Debt equity swap on sale - will it trigger anti avoidance provisions?

Debt equity swap on sale - will it trigger anti...

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I have a client Company who is part of a group in which all the subsidiaries are wholly owned by the Holding Company. Over the years losses made by the various subsidiaries have been relieved via group relief. One of the subsidiaries is about to be sold off and we are trying to structure the deal. As the subsidiary owes the Holding Co a significant amount we are contemplating converting this debt into equity hence increasing the base cost of the Holding Co's investment. Is there a problem with this? Will it trigger any anti avoidance provisions. If so is there a better way to structure the deal.

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By gbuckell
13th Jun 2011 10:58

What are you trying to achieve?

What do you expect to achieve by enhancing the base cost of the subsidiary? If the sub and the group are trading, the substantial shareholding exemption is likely to prevent a loss being claimed. In any event capitalisation of a loan will only add to the base cost an amount equal to the market value of the loan, not its face value. A simpler option may be to release the loan (in whole or part) with the release not being taxable on the sub nor allowable in the parent. The purchaser should pay £1 for the shares and the balance in part repayment of the loan.

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