CFM33120 - Loan relationships: core rules: tax-adjusted carrying value

CTA09/S465B

The loan relationship regime is based on the amounts recognised in the company's accounts. The general rule brings into account the amounts in profit or loss.

However, there are certain aspects of the rules which depend on the balance sheet value of the loan in question. The regime uses the concept of the 'tax adjusted carrying value' (TACV), which takes the carrying value recognised in the accounts and adjusts it to take account of certain tax provisions.

In particular:

  • Where there is a change in accounting basis for a loan from the end of one period to the start of the next, the change in the TACV of the loan is to be brought into account under the regime.
  • Where there is a group transfer of a loan, then in certain cases the loan is treated as being transferred for its TACV

Tax-adjusted carrying value

Basic concept

The starting point in determining the TACV is the carrying value of the asset or liability representing the loan relationship as recognised for accounting purposes. Where a company does not prepare GAAP-compliant accounts, it is assumed that it does.

The accounting carrying value is then potentially subject to a very long list of tax adjustments - see below.

The accounting value to be applied

The carrying value includes amounts recognised in the accounts in respect of:

  • accrued amounts
  • amounts paid or received in advance
  • impairment losses (including provisions for bad or doubtful debts)

If it is necessary to determine the TACV part way through a period, it is to be assumed, for the purposes of computing the TACV, that an accounting period ended at the date of the change. [S465B(7)]

The tax adjustments

The TACV is adjusted to take account of particular rules in the loan relationship regime that either apply a certain accounting treatment to the loan in question, or which otherwise affect the timing of the amounts to be brought into account under the regime

Adjustments may also be needed in respect of:

  • amounts recognised in other comprehensive income (OCI) [(a) and (c)]
  • amounts not fully recognised for accounting purposes [(b)]
  • exclusions for credits on substantial modifications, and the reversal of such credits [(d)]
  • exclusion of revaluation debits and reversal of such disallowed debits [(e) and (f)]
  • company ceasing to be UK resident and non-UK resident company ceasing to hold loan for UK PE [(g)]
  • group transfer of loans [(h)]
  • connected company debt where amortised cost basis of accounting is required [(i)]
  • exclusion of debits from related transactions of connected company debt, and reversal of such debits [(j) and (k)]
  • debt with qualifying link to connected company debt where amortised cost basis of accounting is required [(ka)]
  •  exclusion of impairment losses on connected company debt and reversal of such debits [(l) and (m)]
  •  deemed release of impaired debt becoming held by connected companies [(n)]
  • connected party debt where late interest is only deducted when paid [(o)]
  • corporate partners required to use fair value accounting in certain cases [(p)]
  • application of fair value accounting to index-linked gilts [(q)]
  • special rules for indexed-linked and for FOTRA securities [(r)]
  • deeply discounted securities where discount is only deducted when debt redeemed [(s)]
  • separation of embedded derivatives and equity instruments [(t)]
  • European cross-border transfers of business and mergers [(u) and (v)]
Example 1 - Fair value through OCI

A company has a £20m loan receivable that it holds as 'fair value through other comprehensive income' (FVOCI).

As at 31 March 2023 the fair value of the loan has decreased by £3m meaning the carrying value of the loan in the accounts is £17m, with a £3m debit recognised in OCI. The loan relationship rules mean that amounts recognised in OCI are not at that time brought into account for tax. Instead, they would be brought into account at the time they are transferred to profit or loss (or at derecognition if they are not expected to be so transferred).

The accounting carrying value of £17m is therefore adjusted back up for the £3m that is in OCI, giving a tax-adjusted carrying value of £20m.

Example 2 - Connected company debt

A company has a £50m loan receivable from a connected company which it measures at fair value in its accounts. The connected company rules require it to apply an amortised cost basis of accounting for tax purposes in respect of this loan. The loan is interest bearing and repayable on demand.

As at 31 December 2024 the fair value of the loan has increased, so its carrying value in the accounts is £73m, but under the amortised cost basis of accounting the carrying value would be £50m.

The tax-adjusted carrying value, taking account of the connected company rules, is therefore £50m.

Example 3 - Deeply discounted security

A close company issues a 10-year deeply discounted security to a participator in the company. The loan has an issue price of £60m, redemption amount of £100m and is interest free.

The discounted amount is amortised in the accounts over the life of the instrument on the basis of an effective interest rate method. After two years, the accounting value of the loan in the company's accounts is £66.5m.

For tax purposes, no relief is given for the discount of £6.5m amortised over the first two years. The carrying value of £66.5m in the accounts therefore needs to be adjusted for this amount for which no relief has yet been taken, but which instead should be available at the point the debt is redeemed. The tax-adjusted carrying value is therefore £60m. It will be expected to remain at this value until the debt is redeemed.