LOAN RELATIONSHIP RULES & DEBT FOR EQUITY SWAPS

A company seeks insurance for the risk that the loan relationship group continuity rules could apply to a transaction involving the novation of debt and a debt for equity swap.

The target company undertakes a pre-sale reorganisation to rationalise its debts. This includes the exchange of debt for ordinary shares. Owing to doubt over Her Majesty’s Revenue & Custom’s view of the meaning of “ordinary share capital”, neither party to the deal was prepared to assume the risk that the debt for equity swap created a tax charge under the loan relationships regime. The seller pays for a policy on behalf of the buyer as the seller does not wish to hold back funds in escrow or give an indemnity with a seven-year term for this tax risk. The policy then enables the seller, a private equity fund, to distribute the sale proceeds to investors.

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