CFM98255 - Interest restriction: carry forward rules: excess debt cap and new 'topco'

TIOPA10/S400A CTA10/S724A

The normal rule is that excess debt cap is an attribute of a group which cannot be accessed by another group. FA19 introduced a limited exception to this rule, effective for transactions taking place on or after 29 October 2018. A similar limited exception applies in relation to unused interest allowance, see CFM98245.

This rule may apply where there is an insertion of a new ‘topco’ between the ultimate parent of a group and its shareholders. It is intended to have a similar effect to existing relaxations of ‘no carry-forward on change of ownership’ rules in CTA10/PART14/CH 2-6, which relate, for example, to the carry-forward of trading losses, non-trading loan relationship deficits, and losses of a UK property business. As in the case of those relaxations, the conditions that must be satisfied are set out in CTA10/S724A (Disregard in change of parent company).

The transaction envisaged by S724A is that all of the issued share capital of an existing company, C, is a acquired by a new company, N, or if there is a scheme of reconstruction (defined under S724A(7)) whereby all of the shareholders in C become shareholders in N and the shares in C are cancelled. A continuity condition must be met. The essential elements are that:
• The only consideration given to the former shareholders of C is in the form of shares in N;
• All former shareholders in C get shares in N of equivalent classes; and
• The proportional interests of the shareholders remain the same, or as nearly as may be the same.

Where these requirements are met, the excess debt brought forward of the new group for its first period of account will be the excess debt cap of the old group as generated in the period of account of the old group ending immediately before the acquisition of C by N. So, the new group is effectively treated as a continuation of the old group.

For more on the periods of account in these circumstances, see CFM98245.