Under existing legislation, loan relationships and derivative contracts are transferred within a UK corporate group (75% share ownership and more than 50% economic ownership) on a no gain/no loss basis. This transfer is subject to a potential degrouping charge, should the transferee company leave the group within six years of receiving the loan relationship/derivatives. Where it applies, the transferee company is deemed to have sold and reacquired the instrument immediately before it leaves the group i.e. the difference between the notional value and the fair value of the instrument.
Currently, a degrouping charge is only required to be brought into account in respect of:
- A loan relationship where it creates a credit; or if a loss would arise, where there is a creditor loan relationship and there is a hedging relationship between that loan relationship and a derivative contract and a credit balance will be brought into account on the derivative contract under the degrouping provisions; or
- A derivative contract where it creates a credit; or if a loss would arise, where there is a hedging relationship between the relevant derivative and a creditor relationship and a credit balance will be brought into account on the loan relationship under the degrouping provisions.
The legislation will be amended to remove the restricted circumstances under which the degrouping charges will apply, such that both credits and debits will be brought into account. These changes will apply in respect of all companies leaving groups on or after 1 April 2014.
This measure will be relevant to corporate reorganisations and any sale or purchase of a company. Due diligence should be undertaken to identify any loan relationships and derivative contracts that have been transferred intragroup on which there is a difference between the notional and face value of the instruments, in order to identify any degrouping charges or debits that will arise.