Avoiding Tax Charges on Debt Discounts & Refinancing for property companies

In the aftermath of the Credit Crunch, many property companies were able to negotiate a debt discount as part of a re-finance either with their existing lender or their 'new' lender following a loan book sale and, indeed, many of these negotiations are still taking place.

In any deal that is struck with a lender, borrower companies must be mindful that a taxable credit can arise as a result of the debt write-off. A victory in securing a discount, and perhaps the survival of the company, can soon appear somewhat pyrrhic if there is a resultant tax bill.

In addition, a danger arises where, under new accounting standards (IFRS 9 / FRS 102), a substantial modification of the terms of debt can create a taxable credit in the profit and loss account equal to the difference between the carry value of the "old debt" and the fair value of the "new debt".

Exemption left out of Finance Bill 2015

In the Chancellor's Autumn Statement last year, the UK Government announced they were reviewing tax reliefs for distressed companies with the intention of creating an exemption to avoid tax charges on such credits.

Draft legislation followed quickly in December 2014, detailing that the proposed exemption would apply in relation to releases/write-offs of a borrower's debt after 1 January 2015 or credits arising on refinancing after that date where, in either case, immediately before the release (or refinancing) it is reasonable to assume without the release (or other related arrangements), there would have been a material risk that at sometime within the next twelve months the company would be unable to pay its debts.

In January of this year, HMRC issued draft guidance notes to explain their interpretation of the proposed legislation and, in particular, the key phrases set out in italics. All seemed set for this legislation to be part of the Finance Bill 2015 and thus create some welcome flexibility for restructuring debt in an existing company without triggering potential tax liabilities.

In a pre-election budget surprise last month, the draft legislation was not included and instead, the Chancellor announced that it may be included in future legislation.

What to do when negotiating a debt discount

In the absence of the exemption becoming law, any debtor who is negotiating a debt discount arrangement as part of a refinance must consider obtaining tax structuring advice along with any appropriate advance clearances from HMRC to mitigate any taxable credit.

We have, in the past two years, acted in deals worth in excess of £200m where HMRC clearance has been obtained in connection with the restructuring and refinancing of property debt on a standalone basis, within joint ventures or as part of a group of companies or entities.

If you wish to discuss further with us in relation to your own affairs, please contact John Meehan on 0141 227 9622 or john.meehan@harpermacleod.co.uk.