Q&A: fair value adjustments and tax

In our weekly Q&A, Croner Taxwise tax advisor Seb Lord assesses the tax liability for intercompany loans where an investment property has devalued

Q. Two companies owned by my client have an intercompany loan which has become partially unrecoverable due to a fall in value of the underlying investment property.  Both the loan and the investment property use fair value accounting under FRS102. For tax purposes, can I net off the gain from the impairment of the loan in the creditor company against the fair value reduction in the property as both are currently going through the profit and loss (P&L)?

A. Special rules apply to connected party loan relationships.

Connected for these purposes means:

  • A controls B,
  • B controls A, or
  • A and B are both controlled by the same person.

These rules are set out in Corporation Tax Act 2009 (CTA 2009), section 466.

Control is not simply ownership and can be created in various ways as per CTA 2009, s472. These include:

  • by means of holding shares,
  • by possession of voting power, or
  • as a result of powers conferred by the articles of association.

HMRC’s guidance is available at CFM35010.

Where connected companies impair or realise a loan, no expense is allowable in the creditor company for either an impairment or the release of a debt (CTA 2009, s354) and no income is taxable in the debtor company for the impairment or the released debt (CTA 2009, s358).

There are some exceptions which are detailed in HMRC guidance, CFM35300, but it appears none of these apply here.

Therefore, if the companies are connected companies as defined by CTA 2009, s466, the loan relationship debit and credit are disregarded for tax purposes.

FRS102 – Section 16 requires investment property to be recognised initially at cost and subsequently to be measured at fair value at each reporting date with fair value changes going through profit or loss.

The tax treatment in UK tax law departs from the accounting standards by disallowing depreciation and revaluations in respect of capital assets but not where those assets fall within the loan relationship or intangible assets regimes.

About the author

Seb Lord is a tax advisor at Croner Taxwise

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