CFM38410 - Loan relationships: market value rule: overview
CTA09/S444
S444 sets out a market value rule which applies to the acquisition and disposal of loan relationships. There are a number of specific exceptions where this rule does not apply.
Adjustment
Where a related transaction (any disposal or acquisition of a loan relationship in whole or in part) is not an arm’s length transaction, then any debits or credits brought into account in respect of the transaction are ignored for tax purposes. Instead, the company should calculate the credits and debits as though the transaction had been carried out at arm’s length.
These adjustments cover
- debits and credits arising directly from the related transaction itself
- all future debits and credits.
S444 generally applies to both parties to a loan relationship, if they are within the loan relationship rules.
Example
Inghole Inc subscribes for a security on the open market for £500,000, which will be redeemed at face value in 5 years. In Year 3, when the value of the security is £550,000, it sells it to Jabadaw Ltd for £600,000. The companies are members of the same group but Inghole Inc is not within the charge to corporation tax.
The transaction is not at arm’s length so CTA09/S444 applies.
Because this is not an arm’s length transaction, Jabadaw Ltd must adjust its accounting profits or losses to the amount they would have been had it acquired the security for the arm’s length price, £550,000. Jabadaw will therefore accrue the arm’s length premium - £50,000, the difference between the market value £550,000 and the redemption price £500,000.
Further guidance
CFM31075 - meaning of related transaction
CFM38420 - exceptions to market value rule