I am today announcing the Government’s intention to present to Parliament in the next Finance Bill a change to the rules on how groups of companies are taxed when they buy back their issued debt at a discount to the amount borrowed.

At present where a debtor company is released from its debt liability for less than the amount borrowed it is taxed on the difference between the amount it has borrowed and the amount it pays to be released from its liability. In order to prevent avoidance of the charge the same rules apply where a company connected to the debtor—for instance a fellow group member—instead buys the debt from the creditor. However, in order to help genuine company rescues, there is an exception to this anti-avoidance rule in certain circumstances.

The circumstances are:

where the creditor company is arm’s length to the purchaser; and

where the purchasing company was not connected to the debtor any time during the three-year period ending 12 months before the purchase.

In the present financial conditions many banks and other businesses have issued debt that is trading at a discount to the amount borrowed.

Many, for good commercial reasons, are seeking to buy their debt back from the market. However some are taking advantage of the rules set up to help company rescues in order to avoid being taxed on the profit they make when their debt is cancelled for less than the amount they borrowed. They do this by setting up a new company to buy the debt.

The Government therefore propose to change the rules, which will apply in relation to any debt buybacks that take place from today to ensure that only those debt buybacks that are undertaken as part of genuine corporate rescues will benefit from the buyback profits not being subject to tax.

The changes proposed are that the conditions requiring the purchasing company not to be connected with the debtor during a prescribed period will be replaced by the following three conditions:

there must have been a change in ownership of the debtor in the period of 12 months before the debt purchase;

the debt purchase must have been intrinsic to the change of ownership; and

before the change of ownership, the debtor must have been suffering severe financial problems.

Even if these conditions are met such that the debtor is not taxed on the discount at the time of the buyback, any future cancellation of the debt by the new creditor will result in the debtor being taxed on the previously untaxed discount.