The measure

The Financial Secretary to the Treasury has announced that Finance Bill 2010 will change the rules on how groups of companies are taxed when they buy back their issued debt at a discount to the amount borrowed. The changes are effective from 14 October 2009, the date of the announcement.

The change concerns an exception which allows the discount not to be immediately taxed upon the repurchase transaction in certain circumstances. In the Government's view this is intended to assist 'genuine company rescues' only, but is being taken advantage of by groups which are not genuinely distressed but are nevertheless undertaking a commercial third party debt repurchase transaction.

The proposed amendments aim to ensure that the exception can only apply where a debtor has been 'suffering severe financial problems' and whose ownership then changed prior to the debt repurchase by the group.

The proposed amendments also make it clear that, even where the new requirements are met (and thus the discount is not taxed at the point of the repurchase) any 'future cancellation' of the debt or a debt-for-equity swap in respect of the debt after it becomes an intragroup debt will trigger the tax charge on the discount.

Draft legislation to this effect was published on 9 November 2009 for comment by 18 December 2009.

Who will be affected?

All groups repurchasing issued debt at a discount to the amount borrowed where the offer to buy back the debt was made after 14 October 2009. The changes are likely to have a significant impact on commercial debt repurchase transactions.

When?

The changes are effective from 14 October 2009. However, if the offer to repurchase the debt was made before 14 October and the repurchase occurs before 31 January 2010, the amendments do not have effect. An application for clearance can be made to HMRC to confirm the debt repurchase in question falls within the transitional provisions.