United Kingdom tax: Changes on debt repurchase transactions

The U.K. Financial Secretary to the Treasury has announced that Finance Bill 2010 will change the rules on how groups of companies are taxed when they buy back their issued debt at a discount to the amount borrowed. The changes, which are effective from 14 October, the date of the announcement, are likely to have a significant impact on commercial debt repurchase transactions.

The Financial Secretary's statement is worded in very general terms, and no draft legislation has been published (or even promised). The change concerns an exception that allows the discount not to be immediately taxed upon the repurchase transaction in certain circumstances. In the government's view, this is intended to assist "genuine company rescues" only, but is being taken advantage of by groups that are not genuinely distressed but are nevertheless undertaking a commercial third party debt repurchase transaction.

The proposed amendments will aim to ensure that the exception can only apply where a debtor had been "suffering severe financial problems" and whose ownership then changed before the debt repurchase by the group. In the absence of draft legislation, no detail has been provided on the meaning of "severe financial problems."

The statement also makes it clear that, even where the new requirements are met (and thus the discount is not taxed at the point of the repurchase), any "future cancellation" of the debt after it becomes an intragroup debt will trigger the charge. It is not clear whether this will apply to cancellations of debt purchased before 14 October 2009.