Since the property crash a considerable number of borrowers have been offered the opportunity by their lenders to repay their loans at a compromised amount. This is often known as “debt forgiveness”
Stuart Stead, Partner and Head of Audit and the Property and Construction Sector at Cowgill Holloway looks at the implications for the sector.
Tax charge on debt forgiveness
Any debt forgiveness or discount secured is potentially taxable in the hands of the borrower. For example, if a debt of £2,000,000 is owed but is reduced by agreement to £1,000,000 a significant tax charge could apply on the sum which has been compromised – £1m in this example.
It is clear that this could cause significant cashflow issues as the funding of this tax charge is often overlooked.
Corporate rescue exemption
The exemption introduced by The Finance (No. 2) Act 2015 simplifies the way to avoid a tax charge on debt forgiveness. Put simply, if it is reasonable to assume that the borrower has no realistic prospect of repaying its debt within 12 months following the release or modification of the debt then the tax charge may not apply.
No company should enter into a debt forgiveness arrangement without professional advice. If HMRC disagree there is no going back.
For further information on this subject please contact Stuart Stead, Partner and Head of Property and Construction Sector at Cowgill Holloway. David Rainford, Property Finance Director at Cowgill Holloway has unrivalled experience in the property funding sector. Both can be contacted on 01204 414243
This article is for general guidance only. It provides an outline, and may not include points which are important to your situation. You should not depend on this blog without taking advice based on the full facts of your case. The information given was correct at the time of publication.
The information was correct at time of publishing but may now be out of date.