HMRC has updated its corporate finance manual, including guidance on tax breaks for debt/equity swaps. Nick Huber reports.
Debt/equity swaps are usually prompted by the debtor company encountering trading difficulties. The transaction may involve the lender becoming the majority shareholder in the business, sometimes with the intention of the shares being held over the long term in the hope that they will increase in value. This may allow the lender to recoup all or part of their loss on the debt.
Sometimes the swap will be part of a wider debt restructuring that may involve sale of the remaining debt and/or the equity stake and the issue of shares to management to incentivise future performance.
According to the new HMRC guidance, in the majority of cases, a debt/equity swap which forms part of a commercial debt restructuring, and is undertaken as an arm’s length transaction, will fall within the tax exemption of CTA09/S322(4).