debt assignment cgt

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That’s A Relief! Debts And CGT

Debt on a security, sale proceeds in instalments.

• if the loan notes ‘go bad’ potentially the deferred gains may still fall into charge if the loan notes were disposed of (unless gifted to charity – see HMRC’s Revenue Interpretation 23); and
• the deferred gains will usually not qualify for CGT entrepreneurs’ relief.

Property received in exchange for debt

Practical tip:.

• Where the sale of a company involves deferred consideration, the tax implications are complex: where the structure adopted aims to ensure that relief under TCGA 1992, s 48 might be available, it is vital not to create any debt instrument which might be deemed to be a debt on a security and also a QCB. Expert advice is therefore strongly recommended. 
• Where TCGA 1992, s 251(3) might apply, there are other tax issues which may be relevant, for example stamp duty land tax (or land and buildings transaction tax in Scotland) on the transfer of the property and, again, professional advice is recommended.
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Topic no. 409, Capital gains and losses

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Almost everything you own and use for personal or investment purposes is a capital asset. Examples of capital assets include a home, personal-use items like household furnishings, and stocks or bonds held as investments. When you sell a capital asset, the difference between the adjusted basis in the asset and the amount you realized from the sale is a capital gain or a capital loss. Generally, an asset's basis is its cost to the owner, but if you received the asset as a gift or inheritance, refer to  Publication 551, Basis of Assets  for information about your basis. You have a capital gain if you sell the asset for more than your adjusted basis. You have a capital loss if you sell the asset for less than your adjusted basis. Losses from the sale of personal-use property, such as your home or car, aren't tax deductible.

Short-term or long-term

To correctly arrive at your net capital gain or loss, capital gains and losses are classified as long-term or short-term. Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. For exceptions to this rule, such as property acquired by gift, property acquired from a decedent, or patent property, refer to Publication 544, Sales and Other Dispositions of Assets ; for commodity futures, see Publication 550, Investment Income and Expenses ; or for applicable partnership interests, see Publication 541, Partnerships . To determine how long you held the asset, you generally count from the day after the day you acquired the asset up to and including the day you disposed of the asset.

If you have a net capital gain, a lower tax rate may apply to the gain than the tax rate that applies to your ordinary income. The term "net capital gain" means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss for the year. The term "net long-term capital gain" means long-term capital gains reduced by long-term capital losses including any unused long-term capital loss carried over from previous years. The term “net short-term capital loss” means the excess of short-term capital losses (including any unused short-term capital losses carried over from previous years) over short-term capital gains for the year.

Capital gains tax rates

Net capital gains are taxed at different rates depending on overall taxable income, although some or all net capital gain may be taxed at 0% . For taxable years beginning in 2023, the tax rate on most net capital gain is no higher than  15%  for most individuals.

A capital gains rate of 0% applies if your taxable income is less than or equal to:

• $44,625 for single and married filing separately;
• $89,250 for married filing jointly and qualifying surviving spouse; and
• $59,750 for head of household.

A capital gains rate of  15%  applies if your taxable income is:

• more than $44,625 but less than or equal to $492,300 for single;
• more than $44,625 but less than or equal to $276,900 for married filing separately;
• more than $89,250 but less than or equal to $553,850 for married filing jointly and qualifying surviving spouse; and
• more than $59,750 but less than or equal to $523,050 for head of household.

However, a capital gains rate of  20%  applies to the extent that your taxable income exceeds the thresholds set for the  15%  capital gain rate.

There are a few other exceptions where capital gains may be taxed at rates greater than 20% :

• The taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate.
• Net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28% rate.
• The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.

Note: Net short-term capital gains are subject to taxation as ordinary income at graduated tax rates.

Limit on the deduction and carryover of losses

If your capital losses exceed your capital gains, the amount of the excess loss that you can claim to lower your income is the lesser of $3,000 ($1,500 if married filing separately) or your total net loss shown on line 16 of Schedule D (Form 1040), Capital Gains and Losses . Claim the loss on line 7 of your Form 1040 or Form 1040-SR . If your net capital loss is more than this limit, you can carry the loss forward to later years. You may use the Capital Loss Carryover Worksheet found in Publication 550  or in the Instructions for Schedule D (Form 1040) PDF to figure the amount you can carry forward.

Where to report

Report most sales and other capital transactions and calculate capital gain or loss on Form 8949, Sales and Other Dispositions of Capital Assets , then summarize capital gains and deductible capital losses on Schedule D (Form 1040) .

Estimated tax payments

If you have a taxable capital gain, you may be required to make estimated tax payments. For additional information, refer to Publication 505, Tax Withholding and Estimated Tax, Estimated Taxes and Am I required to make estimated tax payments?

Net investment income tax

Individuals with significant investment income may be subject to the Net Investment Income Tax (NIIT). For additional information on the NIIT, see Topic no. 559 .

Additional information

Additional information on capital gains and losses is available in Publication 550 and Publication 544 . If you sell your main home, refer to Topic no. 701 , Topic no. 703 and Publication 523, Selling Your Home .

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Assignment of Rights in Lawsuit Results in Capital Gain

• Individual Income Taxation

Gains & Losses

The Eleventh Circuit held that a taxpayer's assignment of his rights in an ongoing lawsuit over a land sales contract was the sale of a right to purchase the land subject to the contract, not the sale of the land, and resulted in long-term capital gains to the taxpayer.

From 1994 to 2006, Philip Long, as sole proprietor, owned and operated Las Olas Tower Co. Inc. (LOTC), which was created to design and build a luxury high-rise condominium called the Las Olas Tower on property owned by the Las Olas Riverside Hotel (LORH). LOTC never filed any corporate income tax returns and did not have a valid employer identification number. Instead, Long reported LOTC's income on the Schedule C, Profit or Loss From Business (Sole Proprietorship) , of his individual tax return.

In 2002, Long, on behalf of LOTC, entered into an agreement with LORH (the Riverside agreement) whereby LOTC agreed to buy land owned by LORH for $8,282,800, with a set closing date of Dec. 31, 2004. LORH subsequently terminated the contract unilaterally and, in 2004, LOTC filed suit in Florida state court against LORH for specific performance of the contract and other damages. LOTC won at trial, and the court ordered LORH to sell the land to LOTC pursuant to the Riverside agreement. LORH appealed the judgment. In 2006, Long entered into an agreement with Louis Ferris Jr. (the assignment agreement), under which Long sold his position as plaintiff in the Riverside agreement lawsuit to Ferris for $5.75 million.

On his 2006 tax return filed in ­October 2007, Long reported the income from the assignment agreement as capital gains. In September 2010, the IRS issued a notice of deficiency for 2006 to Long, claiming among other things, that the income from the assignment agreement was ordinary income, not capital gains. Long challenged the IRS's determination in Tax Court.

In Tax Court, the IRS argued that Long received the $5.75 million in lieu of future ordinary income payments and, therefore, that money should be counted as ordinary income under the "substitution for ordinary income doctrine." The Tax Court, treating the assignment agreement as a sale of the land under the Riverside agreement, found that Long intended to sell the land to a developer and concluded that the applicability of the capital gains statute depended on whether Long intended to sell the land to customers in the ordinary course of his business. The Tax Court determined that, while Long intended to sell only the land for the Las Olas Tower project, and not the individual condominium units themselves, the $5.75 million payment for Long's position in the lawsuit nevertheless constituted ordinary income because Long intended to sell the land to customers in the ordinary course of his business. Long appealed the Tax Court's decision to the Eleventh Circuit.

In the Eleventh Circuit, Long argued that the $5.75 million he received from the assignment agreement should be taxed as long-term capital gain rather than as ordinary income. Long contended that he only had an option to purchase LORH's land and the only asset he ever had in the Las Olas Tower project was the Riverside agreement. Therefore, the asset he had sold was the right to purchase land, not the land itself, and the sale was the sale of a capital asset and resulted in capital gains income.

In response, the IRS again argued that Long's proceeds from the assignment agreement were not capital gains from the sale of an asset, but rather a lump-sum substitution for the future ordinary income Long would have earned from developing the Las Olas Tower project. Thus, under the substitute-for-ordinary-income doctrine, the $5.75 million lump-sum payment was taxable as ordinary income. Additionally, in light of this analysis, the IRS argued that the Tax Court's discussion of factors to determine Long's primary purpose for holding the property was irrelevant. Alternatively, the IRS argued that the assignment agreement was a sale of Long's judgment, which resulted in short-term capital gain because Long sold the judgment less than a year after it was entered by the Florida court.

The Eleventh Circuit's Decision

The Eleventh Circuit reversed the Tax Court and held that the income from the assignment agreement was capital gains rather than ordinary income. The Eleventh Circuit found that the Tax Court had erred by misconstruing what property Long had sold, and it rejected the IRS's arguments that the income was short-term capital gains or that the substitute-for-ordinary-income doctrine applied.

The Tax Court analyzed the capital gains issue as if the land subject to the Riverside agreement was the property that Long disposed of in return for $5.75 million. The Eleventh Circuit, however, found that the record from the Tax Court made clear that Long never actually owned the land, and, instead, sold a judgment giving the exclusive right to purchase LORH's land pursuant to the terms of the Riverside agreement. In other words, Long did not sell the land itself, but rather his right to purchase the land, which was a distinct contractual right that might be a capital asset.

The court explained that this distinction was material because the "property" subject to the capital gains analysis was really Long's exclusive right to purchase the property pursuant to the court judgment. Therefore, the correct inquiry was not whether Long intended to sell the land to customers in the ordinary course of his business but whether Long held the exclusive right to purchase the property primarily for sale to customers in the ordinary course of his trade or business. The court found that there was no evidence that Long entered into the Riverside agreement with the intent to assign his contractual rights in the ordinary course of business, nor was there evidence that, in the ordinary course of his business, Long obtained the court judgment for the purpose of assigning his position as plaintiff to a third party. Rather, the record indicated that Long always intended to fulfill the terms of the ­Riverside agreement and develop the Las Olas Tower project himself.

The court concluded that the IRS's short-term capital gains argument failed because the IRS was using the wrong date as the acquisition date for the asset that was subject to capital gains treatment. Because the court found that the asset was Long's exclusive right to purchase land, he obtained the asset in 2002 when he executed the Riverside agreement, which was well over one year before he sold the asset in 2006.

With respect to the substitute-for-ordinary-income doctrine, the Eleventh Circuit observed that whether the doctrine applied depended on the type and nature of the underlying right or property assigned or transferred. If a lump-sum payment is for a fixed amount of future earned income, it is taxed as ordinary income. In Long's case, the court concluded that the profit he received from selling the right to attempt to finish developing a large residential project that was far from complete was not a substitute for what he would have received had he completed the project himself. According to the court, Long's profit was not simply the amount he would have received eventually, discounted to present value. Rather, his rights in the LORH property represented the potential to earn income in the future and, under Eleventh Circuit precedent, selling a right to earn future undetermined income, as opposed to selling a right to earned income, is a critical feature of a capital asset. Thus, the court concluded, the fact that the income earned from developing the project would otherwise be considered ordinary income was immaterial.

Reflections

While the Eleventh Circuit correctly determined that the assignment agreement was not equivalent to a sale of the land subject to the Riverside agreement, it could be argued that it incorrectly determined that the assignment agreement was a sale of a right to purchase the land. At the time of the assignment, LORH's appeal of the trial court's decision in the litigation over the Riverside agreement was ongoing, and Ferris received Long's rights as plaintiff in that litigation. Given that the litigation was ongoing when the assignment agreement was executed, Long did not yet have a choate right to purchase the land. However, even if the court had found that Long had assigned his rights as a plaintiff, whatever those ultimately ended up being, presumably it would have still held that Long had long-term capital gains from the assignment.

Long , No. 14-10288 (11th Cir. 11/20/14)

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What Is a Capital Gain?

Understanding capital gains, capital gains tax, assets eligible for capital gains.

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Capital Gains: Definition, Rules, Taxes, and Asset Types

James Chen, CMT is an expert trader, investment adviser, and global market strategist.

A capital gain refers to the increase in the value of a capital asset when it is sold. Put simply, a capital gain occurs when you sell an asset for more than what you originally paid for it.

Almost any type of asset you own is a capital asset. This can include a type of investment (like a stock, bond, or real estate) or something purchased for personal use (like furniture or a boat).

Capital gains are realized when you sell an asset by subtracting the original purchase price from the sale price. The Internal Revenue Service (IRS) taxes individuals on capital gains in certain circumstances.

Key Takeaways

• A capital gain is the increase in a capital asset's value and is realized when the asset is sold.
• Capital gains may apply to any type of asset, including investments and those purchased for personal use.
• The gain may be short-term (one year or less) or long-term (more than one year) and must be claimed on income taxes.
• Unrealized gains and losses reflect an increase or decrease in an investment's value but are not considered a taxable capital gain.
• A capital loss is incurred when there is a decrease in the capital asset value compared to an asset's purchase price.

Investopedia / Mira Norian

As noted above, capital gains represent the increase in the value of an asset . These gains are typically realized at the time that the asset is sold. Capital gains are generally associated with investments, such as stocks and funds, due to their inherent price volatility . But they can also be realized on any security or possession that is sold for a price higher than the original purchase price , such as a home, furniture, or vehicle.

Capital gains fall into two categories:

• Short-term capital gains : Gains realized on assets that you've sold after holding them for one year or less
• Long-term capital gains : Gains realized on assets that you've sold after holding them for more than one year

Both short- and long-term gains must be claimed on your annual tax return . Understanding this distinction and factoring it into an investment strategy is particularly important for day traders and others who take advantage of the greater ease of trading in the market online.

Realized capital gains occur when an asset is sold, which triggers a taxable event . Unrealized gains , sometimes referred to as paper gains and losses, reflect an increase or decrease in an investment's value but are not considered a capital gain that should be treated as a taxable event. For example, if you own stock that goes up in price, but you haven't yet sold it, that is an unrealized capital gain.

The tax rates for capital gains are listed below.

A capital loss is the opposite of a capital gain. It is incurred when there is a decrease in the capital asset value compared to an asset's purchase price.

Short- and long-term capital gains are taxed differently. Tax-efficient investing can lessen the impact of these taxes. Remember, short-term gains occur on assets held for one year or less. As such, these gains are taxed as ordinary income based on the individual's tax filing status and adjusted gross income (AGI).

Long-term capital gains, on the other hand, are taxed at a lower rate than regular income. The exact rate depends on the filer's income and marital status, as shown below:

Special Capital Gains Tax Rules

Note that there are some caveats. Certain types of stock or collectibles may be taxed at a higher 28% capital gains rate, and real estate gains can go as high as 25%. Moreover, if the capital gains put your income over the threshold for the 15% capital gains rate, the excess will be taxed at the higher 20% rate.

In addition, certain types of capital losses are not deductible. If you sell your house or car at a loss, you will be unable to deduct the difference on your taxes. However, when you sell your primary home, the first $250,000 is exempt from capital gains tax. That figure doubles to $500,000 for married couples.

Individuals whose incomes are above these thresholds and are in a higher tax bracket are taxed 20% on long-term capital gains. High-net-worth investors may have to pay the additional net investment income tax , on top of the 20% they already pay for capital gains.

Not all investments are eligible for the lower capital gains rates. The following are some assets that are and are not eligible.

Capital Gains and Mutual Funds

Mutual funds that accumulate realized capital gains throughout the tax year must distribute these gains to shareholders. Many mutual funds distribute capital gains right before the end of the calendar year.

Shareholders receive the fund's capital gains distribution and get a 1099-DIV form outlining the amount of the gain and the type: short- or long-term.

Undistributed long-term capital gains are reported to shareholders on Form 2439. When a mutual fund makes a capital gain or dividend distribution, the net asset value (NAV) drops by the amount of the distribution. A capital gains distribution does not impact the fund's total return.

Tax-conscious mutual fund investors should determine a mutual fund's unrealized accumulated capital gains, which are expressed as a percentage of its net assets, before investing in a fund with a significant unrealized capital gain component. This circumstance is referred to as a fund's capital gains exposure . When distributed by a fund, capital gains are a taxable obligation for the fund's investors.

Example of Capital Gains

Here's a hypothetical example to show how capital gains work and how they're taxed. Let's say Jeff purchased 100 shares of Amazon ( AMZN ) stock on Jan. 30, 2020, at $350 per share. He then decided to sell all the shares on Jan. 30, 2024, at $833 each. Assuming there were no fees associated with the sale, Jeff realized a capital gain of $48,300: [($833 x 100) - ($350 x 100)] = $48,300.

Jeff is single and earns $80,000 per year, which puts him in the income group ($47,025+ to $519,900 for individuals) that qualifies for a long-term capital gains tax rate of 15%.

Jeff should, therefore, pay $7,245 in tax ($48,300 x 0.15 = $7,245) for this transaction.

How Are Capital Gains Taxed?

Capital gains are classified as either short-term or long-term. Short-term capital gains, defined as gains realized in securities held for one year or less, are taxed as ordinary income based on the individual's tax filing status and adjusted gross income. Long-term capital gains, defined as gains realized in securities held for more than one year, are usually taxed at a lower rate than regular income.

What Is the 2024 Capital Gains Tax Rate?

Your long-term capital gains can be taxed at 0%, 15%, 20%, or 25% These are the same rates as in 2023. The rate at which your gains are taxed will depend on your income, filing status, and the type of asset. Short-term capital gains are taxed at your ordinary income tax rate.

How Do Mutual Funds Account for Capital Gains?

Mutual funds that accumulate realized capital gains must distribute the gains to shareholders and often do so right before the end of the calendar year. Shareholders receive the fund's capital gains distribution along with a 1099-DIV form detailing the amount of the capital gain distribution and how much is considered short-term and long-term. This distribution reduces the mutual fund's net asset value by the amount of the payout though it does not impact the fund's total return.

What Is a Net Capital Gain?

The IRS defines a net capital gain as the amount by which net long-term capital gain (long-term capital gains minus long-term capital losses and any unused capital losses carried over from prior years) exceeds net short-term capital loss (short-term capital gain minus short-term capital loss). A net capital gain may be subject to a lower tax rate than the ordinary income tax rate.

How Do I Avoid Capital Gains Tax on My House?

You can reduce capital gains tax on your home by living in it for more than two years and keeping the receipts for any home improvements you make. The cost of these improvements can be added to the cost basis of your house and reduce the overall gain that will be taxed.

Capital gains are the profits that are realized by selling an investment, such as stocks, bonds, or real estate. Capital gains taxes are lower than ordinary income taxes, providing an advantage to investors over wage workers. Moreover, capital losses can sometimes be deducted from one's total tax bill.

For these reasons, a thorough understanding of capital gains taxes can make a big difference for an investor.

Internal Revenue Service. " Topic No. 409 Capital Gains and Losses ."

Internal Revenue Service. " Rev. Proc. 2023-34 ." Page 8.

Internal Revenue Service. " Topic No. 409: Capital Gains and Losses ."

Internal Revenue Service. " Topic no. 701, Sale of Your Home ."

U.S. Securities and Exchange Commission. " Mutual Funds and ETFs ." Pages 36-37.

Internal Revenue Service. " Mutual Funds (Costs, Distributions, Etc.) ."

Internal Revenue Service. " About Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains ."

Internal Revenue Service. " Publication 550, Investment Income and Expenses ."

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Avoiding the trap

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Mandipa Soni provides practical guidance on avoiding common pitfalls when dealing with debt restructuring

What is the issue?

When undertaking a corporate transaction, debt restructuring can be a complex area with many pitfalls.

What does it mean to me?

Given the impact financing matters can have on a corporate tax profile, getting it wrong can be costly.

What can I take away?

Anyone advising on the restructuring of corporate debt should understand the full history of how the debt arose, and give thought to tax issues that might arise outside the loan relationship rules including distributions, withholding taxes, anti-hybrids and the impact on the corporate interest restriction, among other considerations.

For most tax advisers, when undertaking a corporate transaction, debt restructuring can be a complex area with many pitfalls. Really understanding the transaction and its constituent parts is key, and typically will involve terminology such as debt elimination, refinancing or buy-ins, novations and distressed debt, all of which come with their own tax implications. Given the impact financing matters can have on a corporate tax profile, getting it wrong can be costly.

More often than not, the decision to restructure debt is driven by the commercial reality facing the company or group. Some of the reasons for reorganising debt include:

• To facilitate repatriation of cash through the structure and to shareholders;
• Obtain better terms of lending from third party lenders (which will depend on the level of debt in a group);
• Improve or restore liquidity (e.g. where a company is in financial distress); or
• Enhance the value/credit worthiness of group debtor companies.

As a result, tax advisers play an important role when undertaking any kind of debt restructuring highlighting important tax issues for both the lender (creditor) and the borrower (debtor).

The loan relationships legislation in CTA 2009 provides a framework for the taxation of UK corporate debt. The default position is that companies are required to bring debits and credits into account for corporation tax purposes that are recognised in the P&L. However, there are many exceptions to this basic rule, and this article seeks to uncover some of the key issues in dealing with debt on a group reorganisation, and addresses some of the author’s views on best practice.

What is a loan relationship?

Before we start, a quick refresher on the key term – ‘loan relationship’.

Per s302 CTA 2009, a loan relationship is a money debt, which arises from a transaction for the lending (or borrowing) of money.

As defined in s303(1) CTA 2009, a money debt is any debt that falls, or has fallen, to be settled by the:

• Payment of money;
• Transfer of a right to settlement under a debt which is itself a money debt; or
• Issue or transfer of shares in a company.

The definition of a money debt also includes a transaction that has at any time been a debt that at the option of either party falls to be settled in any of the above ways.

The basic definition of a loan relationship is extended in s303(3), to include money debts arising where an instrument is issued representing security for the debt, or the rights of a creditor in respect of the debt.

The question as to what constitutes a ‘debt’ for these purposes, presents the first challenge here. Ultimately, this becomes a question of the legal substance of the transaction, i.e. the existence of a legal obligation to transfer cash, goods or services to another party. If the creditor has no legal right to the consideration, there can be no debt.

Debt restructuring options

The following sections consider some of the options available in relation to debt reorganisation, and the issues that might arise.

Formal release of debt

A formal release is a method of eliminating debt in a structure. A release of debt would typically result in a P&L debit and credit for the creditor and debtor companies, respectively. In the absence of specific tax legislation to the contrary, for UK tax purposes, it can be expected that credits arising from a formal release would be taxable, and debits tax-deductible.

However, the legislation provides for a different tax treatment, such that any credit would be non-taxable, and any debit non-deductible, providing certain conditions are met and the creditor and debtor companies are ‘connected’ under the loan relationship provisions. Companies are connected for these purposes if one company controls the other, or both are under the common control of a third company. Control is defined in s472 CTA 2009 and requires the power of a person to secure that the affairs of a company are conducted in accordance with his wishes.

There can be complications when seeking to apply the loan relationship provisions to the release of connected company debt.

The debt in question must fall within the loan relationship provisions. That is, it must have arisen through a transaction for the lending of money. The definition of a loan relationship is extended in s479 CTA 2009 to include ‘relevant non-lending relationships’ which are deemed to be loan relationships for tax purposes. However, the scope of the debits and credits to be brought into account under these rules is restricted to specific items such as impairment losses and foreign exchange.

A potential solution may be available under the extended definition of a loan relationship under s303(3), which allows a money debt (that has not arisen from the lending of money) to be deemed a loan relationship by the issue of a debt instrument, such as a company security or promissory note. Whilst any legal document can be an ‘instrument’, it is necessary to ensure that the purpose test is satisfied, i.e. that the instrument is issued for the purpose of representing:

a) Security for the debt; or b) The rights of a creditor in respect of the debt.

Furthermore, the word ‘issued’ is not defined, but requires a unilateral act by the issuer. That is, it is unlikely to apply to a bilateral agreement entered into jointly by both parties.

Care must be taken where a promissory note has been issued in respect of a debt which includes accrued interest. Whilst the release of interest does not, in itself, constitute a payment of interest for UK withholding tax purposes, there is a risk that the issue of a security under s303(3) over accrued interest could give rise to a withholding tax obligation under the funding bond rules. Per s413(2) CTA 2009, the issue of a funding bond creates a payment of interest equal to the market value of the security that requires the issuer to tender to HMRC, bonds to the basic rate of tax on the deemed interest in discharge of the withholding tax liability (s939(2) ITA 2007). Although, if the interest is subsequently released by the creditor, there is an argument that the funding bonds become worthless.

In addition to withholding taxes, there may be other tax costs associated with the release of debt in an international group. For example, a cross-border release could result in a tax mismatch where the release debit is tax-deductible in one country, and the release credit non-taxable in another. The UK’s anti-hybrids legislation seeks to obtain tax symmetry in situations of tax mismatch, and may result in the release credit being taxable in the UK. Clearly, it has become critical to understand the tax treatment in all territories in order to determine the UK tax position, and access to comprehensive international tax advice is necessary when advising in this area.

In addition to tax, there are also non-tax issues to consider. The tax analysis relies on the accounting treatment, and therefore clarity is required as to how the debt, and any release debits and credits may be accounted for. Furthermore, the legal considerations are critical and it will be important to ensure these are understood early in the process, ensuring Company law and legal agreements are not breached. Specific matters may include drafting documentation and modelling distributable reserves positions, which can head off potential dividend blocks in the structure that may prevent the commercial purpose of the transaction succeeding.

One common Company law matter where advice may need to be obtained is where one is releasing debt where the money has been lent by a subsidiary to a parent company, or between two sister companies, as the release may be considered an unlawful distribution under Company Law if the lender has insufficient distributable reserves at the point the balance is released ( Aveling Barford v Perion Ltd [1989]).

Debt buy-ins

Care must be taken when a restructuring or refinancing involves impaired debt (i.e. one that is unlikely to be paid or recovered in full), as provisions exist which can result in a taxable profit where the relevant loan asset is impaired. In these cases, it is important to understand the detailed history of a particular balance, including how it arose, and how it has been measured.

Broadly, the general principle in s358 CTA 2009 that prevents a release credit being taxable for a connected company relationship can be overridden in one of the following cases:

i) A connected creditor company acquires an ‘impaired debt’ to which the debtor is party (s361 CTA 2009); or ii) Two unconnected creditor and debtor companies which are party to an impaired debt, become connected (s362 CTA 2009).

In either of the above situations, the tax treatment is such that there is deemed to be a release of the impaired portion of the debt, giving rise to a taxable credit in the debtor company (effectively overriding s358 CTA 2009).

A taxable credit might also arise on the release of ‘relevant rights’. These are broadly rights that would have been taxable as a ‘deemed release’ (absent exclusions) prior to the introduction of F(No.2)A 2015, which introduced two new corporate rescue exceptions to enable companies in financial difficulty to be refinanced without a tax charge arising on impaired debt. There isn’t enough space on the page to also go into detail on the nuances for financial distress situations in detail (and the topic is deserving of an article in its own right), but broadly, these reliefs ensure that where the debt buy-in has been undertaken as part of a genuine corporate rescue, s358 CTA 2009 should still apply and prevent release credits being brought into account to tax.

Debt for equity

An alternative method for eliminating debt, would be to release debt in consideration for ordinary shares of the creditor company.

In this case, the general rule where debt is swapped for equity in an unconnected debtor, is that the debtor is not required to bring a release credit into account where the debtor company is using an amortised cost basis of accounting for a liability, and the conditions of s322(4) CTA 2009 are met:

‘…the release is: a) In consideration of shares forming part of the ordinary share capital of the debtor company; or b) In consideration of any entitlement to such shares.’

Ordinary share capital is defined for these purposes in s1119 CTA 2010, as ‘all the company’s share capital (however described), other than the capital the holders of which have a right to a dividend at a fixed rate but have no other right to share in the company’s profits’.

However, it is worth noting that in their manuals (CFM33202), HMRC draw attention to the potential misuse of the exemption within s322(4) – ‘Whether or not a debt has been released ‘ in consideration for shares’ will depend on whether on a realistic view of the transaction, s322(4) CTA 2009, construed purposively, can be said to apply to it. ’ HMRC also acknowledge, however, that ‘ In the majority of cases, there will be no doubt that a debt/equity swap that forms part of a commercial debt restructuring, undertaken at arm’s length transaction, will fall within the exemption in CTA09/S322(4). ’

Whilst there are situations where the s322 CTA 2009 provisions might not apply (for example, where an amortised cost basis is not adopted), it is possible that the release credit falls outside of the scope to tax. An example might be where the creditor company agrees to subscribe for additional shares in the debtor company, and uses the subscription proceeds to repay the original debt. In this case, the cash need not transfer hands. This relies on the outcomes from the Re Harmony and Montague Tin and Copper Mining Co Ltd (Spargo) [1873] case which established the principle that a debt obligation owing from one company to another could be offset by the second company’s obligation to pay an equal amount to the first. Care, of course, should be taken to ensure the obligations have equal value.

Transfers of loan relationships between group companies

It may be the case that the debt may be transferred, by novation or otherwise, to other companies in the same group.

In the UK, the Group Continuity rules seek to ensure that tax neutral treatment applies where a transferee company replaces the transferor as a party to a loan relationship. In order to apply these rules, both companies must be within the charge to UK corporation tax and within the same capital gains group (s340 CTA 2009).

The impact of the Group Continuity provisions is that one company directly (or indirectly) replaces the other as a party to a loan relationship and as such, any debits or credits arising from the transfer are ignored. However other debits and credits (such as interest) are treated normally, and arise to the transferor or transferee company according to their periods of ownership.

However, if the transferee company leaves the group within six years of the transfer while still party to the loan relationship, a degrouping charge would arise to bring into account the taxable profits held-over at the time of the transfer of the loan relationship (s344–346 CTA 2009).

In effecting an intragroup transfer of debt, consideration should be given to any relevant legalities. For example, the novation of a liability can only be undertaken with the consent of all parties involved, and therefore, typically requires a tripartite agreement (or similar).

Final thoughts

My key tips and practical considerations for anyone advising on the restructuring of corporate debt would be:

• Understand the full history of how the debt arose – has the debt been previously impaired, or arisen from a previous intra-group transaction?
• Whilst tax is important, the best solution is obtained by being involved in the whole project and adopting a holistic approach, giving consideration to the accounting and legal implications as well. It is worthwhile having a step plan to ensure that you track the impact on reserves and identify the specific order in which steps should be undertaken.
• Use your international network – in today’s tax world, a complete answer will not be obtained by considering the UK in isolation. For all cross-border situations, ensure that you understand the tax treatment for any overseas territories.
• Give thought to tax issues that might arise outside the loan relationship rules including distributions, withholding taxes, anti-hybrids and the impact on the corporate interest restriction.

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• Capital gains tax on property leases
• Technical activities and advice

Assignment of a lease

Assignment of a long lease, assignment of a short lease, grant of a lease, grant of a long lease, grant of a short lease, acca guide to... getting out of a lease.

A property lease is basically a right to use an asset. A lease is a contract by which one party (lessor) gives the use and possession of land and building to another party (lessee) for a specific period of time, usually in return for a specific rent.

This contrasts with a licence, which entitles a person (licensee) to the use of the property, but which is subject to termination at the will of the owner of the property (licensor).

Leases usually run for many years, while licences cover a relatively short period of time (up to two years).

The key point in determining the tax treatment of a lease transaction is to establish whether there is an assignment of a lease or a grant of a lease.

An assignment of a lease is the legal term used for the sale of a lease. On assignment, the owner relinquishes rights over the property.

A grant of a lease is the creation of a new asset. The person who owns the property grants a lease to a tenant for a specific period of time; however, the rights in the property will eventually revert back to the freehold landlord.

The tax treatment on the assignment of a lease depends on whether the taxpayer is selling a long or  short lease.

A long lease is a lease that has more than 50 years to run at the date it was sold; a lease with less than 50 years to run is a short lease.

The capital gains tax (CGT) computation on the assignment of a long lease is quite straightforward; the original cost is deducted from the proceeds and the resulting gain is then subject to CGT (after the annual exemption).

The CGT computation on the assignment of a short lease is slightly more complex.

A lease with a useful life of less than 50 years is called a ‘wasting asset’. As wasting assets depreciate over time, the allowable base cost for CGT purposes is calculated using the lease depreciation tables (Schedule 8 Paragraph 1, TCGA 1992).

The allowable base cost is the original acquisition cost multiplied by the fraction S/P, where: 

• ‘S’ is the percentage from the lease depreciation table for the years of the lease remaining at the date of assignment
• ‘P’ is the percentage from the lease depreciation table for years of the lease remaining at the date of purchase. 

For example:

Sarah purchased a 42-year lease for £100,000 in January 2000. In January 2012, she sells the lease for £150,000.

As 12 years have passed since original acquisition, Sarah is selling a lease with 30 years left to run.

From the proceeds of £150,000, we deduct the allowable base cost (which is the original acquisition cost multiplied by the fraction S/P).

From the lease depreciation table, the relevant percentage for a 42-year lease is 96.593 and for a 30-year lease the relevant percentage is 87.33.

The capital gain is therefore:

Proceeds: £150,000

Allowable cost:

100,000 x 87.33/96.593 (90,410)

Gain: £59,590

A long lease will become a short lease once less than 50 years are remaining.

Louise bought a 60-year lease on 1 January 1990 for £90,000. She sells the lease on 1 January 2010 for £120,000.

As 20 years have passed since original acquisition, Louise is selling a lease with 40 years left to run.

Accordingly, Louise is selling a short lease and we need to refer to the lease depreciation tables.

The percentage for 50 years or more is always 100, and the percentage for a 40-year lease is 95.457.

Proceeds: £120,000

90,000 x 95.457/100 (85,911)

Gain: £34,089

As with the assignment of a lease the tax implication on the grant of a lease depends on the length of the lease granted.

Where a freeholder grants a long lease to a tenant, CGT is calculated by using the part-disposal formula:

The allowable cost is the acquisition cost multiplied by the fraction A/(A+B), where:

• ‘A’ is the gross amount of the premium paid
• ‘B’ is the value of the remainder or the reversionary interest. 

Rose grants a 55-year lease on a freehold property which she purchased in 2000 for £100,000.

She receives a premium of £150,000 from the leaseholder. The value of the freehold reversion is £200,000.

Premium: £150,000 

100,000 x 150,000/(150,000+200,000) (42,857)

Gain: £107,143

The premium received from the grant of a short lease must be split between the amount chargeable to income tax (under property income rule ITTOIA 2005 S 277 (4)) and the amount chargeable to CGT.

The capital element chargeable to CGT is 2 per cent x (N-1) x P, where:

• ‘N’ is the number of years of the lease
• ‘P’ is the premium received. 

The grant of a lease out of a freehold is treated as a part-disposal; accordingly, allowable cost is calculated as the acquisition cost multiplied by the fraction a/(A+B), where:

• ‘A’ is the gross premium paid
• ‘B’ is the reversionary interest
• ‘a’ is the part of the premium that is chargeable to CGT. 

Elizabeth bought a freehold property 20 years ago for £50,000. In 2010, she granted a 40-year lease for a premium of £100,000, the reversionary interest being £200,000.

We first need to split the premium of £100,000 into the amount subject to income tax and the amount subject to CGT:

The capital element is 2% x (40-1) x £100,000 = £78,000.

The amount chargeable to income tax (as property income) is the difference between the premium received and the amount charged to CGT (£100,000-£78,000 = £22,000).

The capital gain is as follows:

Capital element of the premium: £78,000

Less allowable cost:

50,000 x 78,000/(100,000+200,000) (13,000)

Gain: £65,000

The above only looks at tax implications on assigning or granting of a lease; however, there might be legal implications if the taxpayer wishes to get out of a lease agreement before the end of the term.

This guide can be downloaded from the 'Related documents' section on this page.

Related documents

Related links.

TCGA 1992: Schedule 8, Paragraph 1

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What is a CGT asset?

Last updated 19 July 2021

Many CGT assets are easily recognisable, for example, land, shares in a company, and units in a unit trust. Other CGT assets are not so well understood such as contractual rights, options, foreign currency, cryptocurrency and goodwill. All assets are subject to the CGT rules unless they are specifically excluded.

One example of cryptocurrency is bitcoin. Our view is that bitcoin is neither money nor Australian or foreign currency. Rather, it is property and is an asset for CGT purposes. Other cryptocurrencies that have the same characteristics as bitcoin will also be assets for CGT purposes and will be treated similarly for tax purposes. For more information, see Tax treatment of cryptocurrencies .

CGT assets fall into one of three categories:

• collectables
• personal use assets
• other assets.

Collectables

Collectables include the following items that you use or keep mainly for the personal use or enjoyment of yourself or your associates:

• paintings, sculptures, drawings, engravings or photographs, reproductions of these items or property of a similar description or use
• coins or medallions
• rare folios, manuscripts or books
• postage stamps or first day covers.

A collectable is also:

• an interest in any of the items listed above
• a debt that arises from any of those items
• an option or right to acquire any of those items.

You can only use capital losses from collectables to reduce capital gains (including future capital gains) from collectables. You disregard any capital gain or capital loss you make from a collectable if any of the following apply:

• you acquired the collectable for $500 or less
• you acquired an interest in the collectable for $500 or less before 16 December 1995
• you acquired an interest in the collectable when it had a market value of $500 or less.

If you dispose of a number of collectables individually that you would usually dispose of as a set, you are exempt from paying CGT only if you acquired the set for $500 or less. This does not apply to an individual collectable you acquired before 16 December 1995, which is exempt from CGT if you acquired it for less than $500. This is irrespective of whether or not it would usually be disposed of as part of a set.

Personal use assets

A personal use asset is:

• a CGT asset, other than a collectable, that you use or keep mainly for the personal use or enjoyment of yourself or your associates
• an option or a right to acquire a personal use asset
• a debt resulting from a CGT event involving a CGT asset kept mainly for your personal use and enjoyment
• a debt resulting from you doing something other than gaining or producing your assessable income or carrying on a business.

Personal use assets may include such items as:

• electrical goods
• household items
• cryptocurrency (if it is kept or used mainly to purchase items for personal use or consumption).

Land and buildings are not personal use assets. Any capital loss you make from a personal use asset is disregarded.

If a CGT event happened to a personal use asset, disregard any capital gain you make if you acquired the asset for $10,000 or less. If you disposed of personal use assets individually that would usually be sold as a set, you get the exemption only if you acquired the set for $10,000 or less.

Other assets

Assets that are not collectables or personal use assets include:

• shares in a company
• rights and options
• units in a unit trust
• cryptocurrency (if it is not kept or used mainly to purchase items for personal use or consumption)
• convertible notes
• your home (see Exemptions )
• contractual rights
• foreign currency
• any major capital improvement made to certain land or pre-CGT assets.

Partnerships

It is the individual partners who make a capital gain or capital loss from a CGT event, not the partnership itself. For CGT purposes, each partner owns a proportion of each CGT asset. Each partner calculates a capital gain or capital loss on their share of each asset and claims their share of a credit for foreign resident capital gains withholding amounts.

Tenants in common

Individuals who own an asset as tenants in common may hold unequal interests in the asset. Each tenant in common makes a capital gain or capital loss from a CGT event in line with their interest in the asset. For example, a couple could own a rental property as tenants in common with one having a 20% interest and the other having an 80% interest. The capital gain or capital loss made when the rental property they dispose of (or another CGT event happens) is split between the individuals according to their legal interest in the property.

Joint tenants

For CGT purposes, individuals who own an asset as joint tenants are each treated as if they own an equal interest in the asset as a tenant in common . Each joint tenant makes a capital gain or capital loss from a CGT event in line with their interest in the asset. For example, a couple owning a rental property as joint tenants split the capital gain or capital loss equally between them.

When a joint tenant dies, their interest in the asset is taken to have been acquired in equal shares by the surviving joint tenants on the date of death.

Separate assets

For CGT purposes, there are exceptions to the rule that what is attached to the land is part of the land. In some circumstances, a building or structure is considered to be a CGT asset separate from the land.

Improvements to an asset (including land) acquired before 20 September 1985 may also be treated as a separate CGT asset.

Buildings, structures and other capital improvements to land you acquired on or after 20 September 1985

A building, structure or other capital improvement on land that you acquired on or after 20 September 1985 is a separate CGT asset, not part of the land, if a balancing adjustment provision applies to it. For example, a timber mill building is subject to a balancing adjustment if it is sold or destroyed, so it is treated as an asset separate from the land it is on.

Buildings and structures on land acquired before 20 September 1985

A building or structure on land that you acquired before 20 September 1985 is a separate asset if:

• you entered into a contract for the construction of the building or structure on or after that date, or
• there was no contract for its construction, and construction began on or after that date.

Other capital improvements to pre-CGT assets

If you make a capital improvement to a CGT asset you acquired before 20 September 1985, this improvement is treated as a separate asset. It is subject to CGT if, at the time a CGT event happens to the original asset, the cost base of the capital improvement is:

• more than the improvement threshold for the year in which the event happens (see table 1 )
• more than 5% of the amount of money and property you receive from the event.

If there is more than one capital improvement and they are related, they are treated as one separate CGT asset if the total of their cost bases is more than the threshold.

The improvement threshold is adjusted to take account of inflation. The thresholds for 1985–86 to 2020–21 are shown in table 1 .

Example 3: Adjacent land

On 1 April 1984 Dani bought a block of land. On 1 June 2021, she bought an adjacent block. Dani amalgamated the titles to the two blocks into one title.

The second block is treated as a separate CGT asset distinct from the first block. Since the second block was acquired on or after 20 September 1985 it is subject to CGT provisions. Therefore, Dani can make a capital gain or loss from the second block when the whole area of land is sold.

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What is required for court-ordered assignment of debt?

Court-ordered assignment of debt.

When a borrower has outstanding debt that was assigned to another party by court order (such as under a divorce decree or separation agreement) and the creditor does not release the borrower from liability, the borrower has a contingent liability. The lender is not required to count this contingent liability as part of the borrower’s recurring monthly debt obligations. 

The lender is not required to evaluate the payment history for the assigned debt after the effective date of the assignment . The lender cannot disregard the borrower’s payment history for the debt before its assignment.

For additional information, see  B3-6-05, Monthly Debt Obligations .

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• Personal tax
• Self Assessment
• Capital Gains Tax and Debts (Self Assessment helpsheet HS296)
• HM Revenue & Customs

HS296 Capital Gains Tax and Debts (2022)

Updated 6 April 2023

© Crown copyright 2023

This publication is licensed under the terms of the Open Government Licence v3.0 except where otherwise stated. To view this licence, visit nationalarchives.gov.uk/doc/open-government-licence/version/3 or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or email: [email protected] .

Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned.

This publication is available at https://www.gov.uk/government/publications/debts-and-capital-gains-tax-hs296-self-assessment-helpsheet/hs296-capital-gains-tax-and-debts-2022

This helpsheet explains how:

• debts are dealt with for Capital Gains Tax purposes
• you may be able to claim an allowable loss if a loan you have made to a trader cannot be repaid
• you may be able to claim an allowable loss if you have guaranteed a loan to a trader which cannot be repaid and have to pay up under the guarantee

This helpsheet only explains the basic rules as they apply in simple cases. In more complex cases you may need to obtain professional advice. If you’re in any doubt about your circumstances you should ask your tax adviser.

The Capital Gains Manual explains the rules in more detail.

This helpsheet will help you fill in the Capital Gains Tax summary pages of your tax return.

This guidance does not apply to cryptoassets or cryptoasset lending. Find out more information on cryptoassets .

A debt exists whenever money is owed to someone else. A debt is an asset in the hands of the creditor or lender. That asset will be disposed of when the debt is repaid or if the lender sells or transfers the debt. There are only a limited number of circumstances in which such a disposal gives rise to a chargeable gain or allowable loss.

In the hands of the debtor or borrower a debt is not an asset but a liability. Capital Gains Tax is concerned with the disposal of assets, not liabilities. A borrower will not make a chargeable gain or allowable loss from the disposal of a debt.

How debts are dealt with for Capital Gains Tax purposes

Debts can be divided into 3 broad categories for Capital Gains Tax purposes.

Simple debts

A simple debt is a straightforward loan or amount owed by one person to another. Simple debts are not chargeable assets in the hands of the original lender, but you may be able to claim a loss if a loan you have made to a trader cannot be repaid.

It’s possible to buy debts. A debt will be a chargeable asset if you’re not the original lender. But a loss on the disposal of a simple debt, by a person who is not the original lender, may not be allowable for Capital Gains Tax purposes. Ask HMRC for advice on Self Assessment or your tax adviser for details.

Securities are more formal loans made to companies. Securities are chargeable assets in the hands of the original lender but many securities are exempt from Capital Gains Tax because they’re qualifying corporate bonds (QCBs). If you buy or subscribe for listed securities, your broker or the company should be able to tell you whether they’re qualifying corporate bonds.

If you acquired the qualifying corporate bond on a company share reorganisation or takeover there may be a chargeable gain or allowable loss on its disposal. You can find more information in Helpsheet 285 Capital Gains Tax, share reorganisations and company takeovers in the section on company takeovers and Capital Gains Tax.

Loans made to unlisted companies may also be securities and qualifying corporate bonds. This can be a complex subject, ask HMRC for advice on Self Assessment or your tax adviser for help.

Gilt-edged securities

Gilt-edged securities, or ‘gilts’, are UK Government securities issued by the Treasury. Gilts are exempt from Capital Gains Tax.

Losses on loans to traders

If you make a loan to a trader you may be able to claim an allowable loss if the loan cannot be repaid. The loan must have been used wholly for trade purposes and have become irrecoverable. You cannot claim if the borrower was your spouse or civil partner, either when the loan was made or subsequently.

You lend £30,000 to your brother to start a bicycle shop. After trading successfully for a number of years, the business fails. £5,000 of the loan is repaid to you but £25,000 is irrecoverable. You can claim an allowable loss of £25,000. If you claim the relief you’ll be taxable on any amounts of the loan subsequently repaid.

Two years after you make the claim your brother is able to repay £10,000. You’re treated as having made a capital gain of £10,000 in the tax year in which the £10,000 is repaid.

Loans that qualify

To qualify for relief the loan must be to a borrower who:

• uses the money wholly for the purposes of a trade
• uses the money to set up a trade, as long as they start trading

A trade includes a profession or vocation, but does not include money lending. If the loan is made to a company, that company can pass the money to another company in the same group to be used in that other company’s trade.

Loans may include credit balances on a director’s loan account but not ordinary trade debts. Exceptionally, trade debts may qualify for relief if there’s a specific agreement to extend the period of credit beyond what’s customary for the trade concerned. But you cannot claim an allowable loss if you have claimed the bad debt as a trading expense.

The loan must not be a security. If the loan is a security but not a qualifying corporate bond the ordinary rules of Capital Gains Tax will allow you to claim an allowable loss if the loan becomes worthless. If the loan is a qualifying corporate bond and was made before 17 March 1998 you may be able to claim a separate relief. Ask HMRC for advice on Self Assessment .

‘Irrecoverable’ and what it means

Relief is only due if the loan has become irrecoverable. This does not mean merely that the borrower cannot repay the loan at the date you make the claim. You have to show that there was no reasonable prospect of the loan ever being repaid. If the borrower continues to trade this test is unlikely to be satisfied.

The loan must have become irrecoverable. Relief will not be due if the loan was irrecoverable when it was made. If you make a claim shortly after making the loan this may cast doubt on whether the loan was ever recoverable. The loan must not have become irrecoverable as a result of the terms of the loan or some act or omission by the lender.

How the relief is given

The relief is given by treating the amount outstanding of the loan principal as an allowable loss. Relief can be claimed once any outstanding amount of the loan has become irrecoverable. You can make a claim if both the:

• borrower has been placed in bankruptcy, receivership or liquidation
• receiver or liquidator has announced an anticipated dividend for unsecured debts and has indicated that no further dividends are likely

You have lent £12,000 to a company. Having repaid you only £2,000, the company goes into liquidation. The liquidators say they hope to make a payment of 20 pence in the pound to unsecured creditors but there will be no further payments. You may claim an allowable loss.

How to make a claim

After the loan has become irrecoverable there’s no time limit in which to make the claim. The loss will arise:

• at the time you make the claim or, if you want
• at an earlier time you specify when you make your claim that falls in either of the 2 previous tax years, provided all the necessary conditions for relief are satisfied at the date you make the claim and at the earlier time

So, if you make a claim during the tax year 2022 to 2023, any loss will arise in 2022 to 2023. Alternatively, you can ask for the loss at an earlier time specified in your claim that falls during 2020 to 2021 or 2021 to 2022, provided all the necessary conditions for relief were also satisfied at that earlier time. If you want to make a claim for 2022 to 2023, write to HMRC for advice on Self Assessment giving details of your claim.

If you want to make a claim for 2021 to 2022 in your tax return for 2021 to 2022, you should enter code ‘OTH’ in box 36 on page CG 2 and provide details of the claim (including details of the earlier time at which relief is sought) in the ‘Any other information’ box, box 54, or in your computations, providing a clear statement that you’re claiming this relief. Include the loss in box 27 and box 35 on page CG 2 of your Capital Gains Tax summary pages.

During the tax year 2022 to 2023 you can also ask for the loss to be given at a time falling in 2020 to 2021 by amending your 2020 to 2021 tax return on or before 31 January 2023. If you decide to ask for the carry back to 2020 to 2021 at some time between 1 February 2023 and 5 April 2023 you’ll have to send HMRC a separate notice.

What happens if you recover the loan

If you recover any amount for which you have claimed relief the amount you receive is treated as a chargeable gain. The chargeable gain arises in the tax year the payment is received and at the time of recovery. If you received any such payments in 2021 to 2022, you should add the amount to other chargeable gains and enter it in boxes 32 and 34 of the Capital Gains summary pages.

Relief for payments made under guarantees given on behalf of traders

Instead of making a loan to a trader yourself you may act as guarantor for a loan. If the loan, or the interest on it, becomes irrecoverable and you have to pay up under your guarantee, you may claim an allowable loss. The relief will be reduced by any amounts payable by co-guarantors. The conditions for relief are very similar to those which apply to losses on loans to traders.

Your brother borrows £20,000 from the bank to set up a bicycle shop. You provide a personal guarantee for the loan. After a period of trading successfully the business fails. The loan cannot be repaid. The bank calls on you to pay £20,000 under the guarantee. You can claim an allowable loss of £20,000 in the year the payment is made.

The conditions for relief

The guarantee must be made for a loan which satisfies the necessary conditions. The only difference is that relief can be given for a guarantee of a loan which is a security. Some part of the loan or the interest on the loan must be outstanding at the date of the guarantee payment. This amount must be irrecoverable from the borrower.

The borrower and lender must not have been spouses or civil partners either when the loan was made or subsequently. And you and the borrower must not have been spouses or civil partners either when you gave the guarantee or subsequently.

How the relief is worked out

The amount you pay under the guarantee will be treated as an allowable loss, but the amount of relief will be limited if you’re entitled to receive any payments from co-guarantors. This restriction is not limited to amounts you actually receive from co-guarantors. However, you must take account of their ability to pay. If a co-guarantor is unable to make a payment, the liability of the other guarantors will be increased accordingly. If you think this restriction applies, you should ask HMRC for advice on Self Assessment or your tax adviser for help. On the other hand, you can claim relief for amounts you have to pay as a co-guarantor.

The appropriate proportion of the payment is treated as an allowable loss for the year in which the payment is made.

If you made a guarantee payment in 2021 to 2022, you should enter code ‘OTH’ in box 36 on page CG 2 and provide details of the claim in the ‘Any other information’ box, box 54, or in your computations, providing a clear statement that you’re claiming this relief. Include the loss in boxes 27 and 35 on page CG 1 of your Capital Gains summary pages.

The claim has to be made within 4 years of the end of the tax year in which you make the payment under the guarantee. If, after you have made a claim, you recover any amount of the loan or interest, or any part of the guarantee payment, the amount you receive is treated as a chargeable gain. The chargeable gain arises in the year the payment is received and at the time of receipt. If you have received such a payment in 2021 to 2022, you should include the amount with any other gains and enter it in boxes 32 and in 34 of the Capital Gains summary pages.

For more information about online forms, phone numbers and addresses contact Self Assessment: general enquiries .

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Thinking | 4 June 2020

Debt forgiveness in a COVID-19 environment

The COVID-19 restrictions are slowly easing but the economic impacts are far from over.  While businesses struggle to find ways to free up cash, it is likely we will see restructuring of loans and waiving of debts.

Taxpayers and their advisors need to be aware of the taxation implications of restructuring and forgiving loans, including the Commercial Debt Forgiveness ( CDF ) rules, Division 7A and the CGT rules.

Key takeaway

The COVID-19 environment may lead to more debts being forgiven or treated as forgiven in the coming months.  The CDF rules and Division 7A are complex provisions with many modifications for different types of entities and debts.

Given the broad range of circumstances in which a debt may be treated as ‘forgiven’, it is possible that taxpayers may inadvertently find themselves in the CDF rules or Division 7A.  In the current economic climate, taxpayers may be restructuring loans to avoid defaulting and should be aware that in certain cases, such as where there is an assignment or a debt/equity swap, the restructure may cause the debtor to lose certain tax attributes or be assessable on a deemed dividend.

The CDF provisions are in Division 245 of the 1997 Act.  The rules apply to the debtor who receives the benefit of the debt forgiveness by requiring certain tax attributes (such as losses, deductions etc) to be reduced.  Importantly, the breadth of the CDF rules means taxpayers may find themselves inadvertently subject to the provisions even if they did not intend for a debt to be ‘forgiven’.

The CDF rules are an integrity measure to provide symmetry to the tax treatment of the debt.  As the creditor may be able to claim a deduction or a capital loss for the forgiven debt, a tax adjustment can be imposed on the debtor, by reducing certain of its tax attributes that would otherwise be used to decrease its taxable income in future income years.

What debts are covered by the CDF rules?

The CDF rules do not use the usual definition of ‘debt’ that applies in other provisions of the tax law.  A debt will only be covered by the CDF rules where some or all of the interest payable on the debt is, was or will be allowed as a deduction to the debtor.  If the interest is made non-deductible by a provision in the tax law (other than section 8-1 of the 1997 Act), it will still fall within the CDF rules.

If no interest is payable on the debt, it may still be subject to the CDF rules if the interest would have been deductible had it been charged.

Unpaid trust distributions will generally not be covered by the CDF rules as the amount is not a ‘debt’ unless it has been converted into a loan.

When is a debt ‘forgiven’?

There are a number of ways in which a debt can be ‘forgiven’ under the CDF rules.  The debtor’s obligation to pay may be waived or released or the parties enter an agreement to cease the liability at a future date for nominal consideration.

A debt is also ‘forgiven’ if it becomes statute barred.

Additionally, a debt is ‘forgiven’ if it is assigned by the creditor to an associate of the debtor, or there is a new arrangement where the debtor and the new creditor are parties.  As such, where loans are restructured by way of assignment between related entities, the CDF rules may be triggered.

The rules can also apply where there is a debt/equity swap where the debtor issues shares to the creditor and uses the subscribed funds to repay the debt.

Implications for the borrower

If a debtor has a debt that has been forgiven and is subject to the CDF rules, it must calculate the ‘net forgiven amount’ and apply this to reduce its tax attributes in the following order:

• Deductible revenue losses
• Deductible net capital losses
• Certain deductible expenditure
• Cost base of certain CGT assets.

If there is still a net forgiven amount left, it is disregarded (unless the debtor is a partnership in which case it is applied to the partners).

Net forgiven amount

The gross forgiven amount is the value of the debt less any consideration given to the creditor for forgiving the debt.

In most cases, the debtor is assumed to be solvent and the value of the debt is its market value on the date the debt is forgiven.  Generally, this will be the value of the asset in the hands of the creditor (most likely face value).

In some cases, the insolvency of the debtor may be taken into account giving the debt a nominal value (on the basis that it was virtually worthless).  This may occur where the debt was not entered into on an arm’s length basis and the creditor is not in the business of lending money and is an Australian resident (or the forgiveness was a CGT event involving taxable Australian property).

The consideration provided by the debtor to have the debt forgiven is generally the amount the debtor has paid (or is required to pay) and the market value of any property given (or required to be given) in respect of the forgiveness.  Market value is calculated at the date the debt is forgiven.

If the debtor did not provide any consideration to the creditor, or the parties were not dealing at arm’s length, the consideration is deemed to be the market value of the debt when it is forgiven (assuming the creditor is a resident or the forgiveness is a CGT event involving taxable Australian property).

The rules are modified where the debt was forgiven by assignment or by way of a debt/equity swap.

The gross forgiven amount (if any) is reduced by certain amounts that result from the forgiveness that will be included in the debtor’s taxable income.  The result is the net forgiven amount .

How to reduce the tax attributes?

The debtor must first reduce its tax losses by the net forgiven amount.  This includes tax losses from any income year prior to the forgiveness year.

Any net forgiven amount remaining after it has been applied to tax losses must be applied to capital losses.  This includes capital losses for any income year prior to the forgiveness year.

If there is still a net forgiven amount remaining, it is applied to reduce certain deductible expenditure incurred prior to the forgiveness year.  The CDF rules list the types of deductions that may be reduced which includes capital allowances, borrowing expenses, R&D and capital works.

Finally, if there is a net forgiven amount remaining, it is applied against the cost base of the debtor’s CGT assets.  The net forgiven amount cannot reduce the cost base of any asset lower than the reduced cost base which is calculated on the assumption it was disposed of for market value on the first day of the forgiveness year.  Certain assets are excluded including pre-CGT assets, assets acquired during the forgiveness year, personal use assets, main residence and goodwill.

Division 7A

In cases where a private company has a debt owed to it by a shareholder or their associate, the forgiveness of the debt can also trigger a deemed dividend to the debtor under Division 7A of the Income Tax Assessment Act 1936 ( 1936 Act ).

When is a debt forgiven for Div 7A purposes?

Section 109F of the 1936 Act is the relevant deeming provision.  It picks up the same concepts of when a debt is forgiven as the CDF rules.  It also applies to debt parking arrangements in which the private company assigns the debt to an associate of the debtor.  Additionally, section 10F applies where a reasonable person would conclude the company will not insist on repayment of the debt.

Importantly, if the extended meaning of forgiveness results in the same debt being forgiven multiple times, section 109F will only operate on the earliest.  For example, if a debt has become statute barred in an earlier year of income and is formally released in a subsequent year, section 109F will only operate to deem a dividend in the earlier year when the statute barring arose.  As such, a detailed review of a debt’s history should be performed to ascertain whether section 109F has already deemed a dividend in an earlier year, such that the subsequent formal release will have no further impact.

Are there any exceptions?

Section 109G of the 1936 Act provides for various cases where a deemed dividend will not arise, including:

• where the debtor is a company (acting in its own capacity);
• the debtor becomes bankrupt; or
• the debt itself triggered a deemed dividend. This last exclusion can be important as review of the history of the debt may reveal that making of the loan triggered a deemed dividend in an earlier year, such that the formal release will not trigger a further deemed dividend.

Finally, the Commissioner of Taxation has discretion to disregard a deemed dividend arising on forgiveness of a debt if he is satisfied the forgiveness was because payment would cause undue hardship, the borrower was solvent when the debt arose and has subsequently lost the ability to repay due to circumstances beyond their control.  The impacts of COVID-19 will presumably see many applications for the Commissioner’s discretion being made.

Implications for the lender

The tax implications for the lender will depend on their individual circumstances.  If the creditor made the loan in the ordinary course of business or for income producing purposes, it may be entitled to a deduction or a capital loss for the value of the forgiven debt.

If the lender received no consideration for the forgiveness, the CGT rules will deem it to receive market value proceeds.  If the debtor is solvent, this could amount to deemed proceeds equal to the face value of the debt, resulting in no capital gain or loss being realised.

Finally, if the lender did not make the loan for income producing purposes, for example if the loan was interest-free or made to a discretionary trust, the loan will be a personal use asset for CGT purposes and the lender will be required to disregard a capital loss.

Anthony Bradica

Frank Hinoporos

Partner & Head of Tax

Andrew O’Bryan

Michael Parker

Jim Koutsokostas

Special Counsel

Senior Associate

Related practices

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Tax & Superannuation | 4 Jun 2020

Bad debts deductions – what you need to know

COVID-19 has had a debilitating effect on many sectors of the economy and unfortunately, the coming 12 months will see more businesses in financial distress and an uptick in business insolvency. In such an environment, the commercial reality is that many businesses will be owed debts that will not be paid in full or at all. For many businesses, this could spell disaster. For this reason, debtor management is crucial in the present environment. Our Tax team discuss.

Property tax issues arising from COVID-19 arrangements

The COVID-19 shutdown has had a devastating impact on residential and commercial property arrangements. For landlords and tenants, the Government has supported an ‘everyone shares the pain’ framework to alleviate cash flow pressure on both sides.

The legal framework has been dissected in our dedicated COVID-19 insights page covering various real estate announcements from the Government to date, which can be accessed here.

As financial year-end approaches, landlords and tenants are turning their mind to year-end tax issues in this unique property environment. The deductibility of property and related expenses has been a hot topic garnering a lot of interest with cash flow remaining a primary concern.

Nigeria: Capital Gains Tax In The Nigerian Capital Market And Stocks Investment Under Finance Act 2021

Introduction

It is now a well-established norm that tax laws are periodically reviewed in Nigeria in compliance with the National Tax Policy adopted by the Federal Executive Council in 2018 1 . Starting from 2019, the National Assembly has always accompanied the Appropriation Act with the Finance Act with a view to stir the annual budget performance and control the economy using the fiscal tool. The Finance Act, depending on the macro-economic policy of the federal government in any financial and fiscal year, amends relevant tax laws and related statutes including the Capital Gains Tax Act 2 . The Finance Act (FA) 2021 is not an exception.

Pursuant to his constitutional powers, the Finance Act, 2021 which amended thirteen laws of the federation was assented to by the President of the Federal Republic of Nigeria on 31st December 2021. The amendment took effect from 1st January, 2022 3 and shall remain in force as the existing legal order guiding the administration and management of all the provisions of tax laws so amended. For the record, the Finance Act, 2021 amends the following laws:

• Capital Gains Tax Act
• Companies Income Tax Act
• Customs, Excise Tariffs, Etc, (Consolidation) Act
• Federal Inland Revenue Service Establishment Act
• Finance (Control and Management) Act
• Fiscal Responsibility Act
• Insurance Act
• National Agency for Science and Engineering Infrastructure Act
• Nigerian Police trust Fund (Establishment) Act
• Personal Income Tax Act
• Stamp Duties Act
• Tertiary Education Trust Fund (Establishment) Act
• Value Added Tax Act

The scope of this article is limited to current amendments made to capital gains tax in relation to the capital market, i.e., the financial system involved in raising capital through dealing in shares, bonds, stocks, saving certificates, securities, and other long-term investments. The following persons and bodies are the major stakeholders in the Nigerian capital market: Nigerian Stock Exchange (NSE), Securities and Exchange Commission (SEC), Individual Local and Foreign Investors and corporate investors. This article will examine the current legal framework of capital gains tax in relation to disposal, acquisition and or sale of shares, bonds, stocks, or securities in Nigeria's capital market.

Capital Gains Tax (CGT) is the levy imposed on the gains arising from the disposal of chargeable assets under the principal legislation i.e., Capital Gains Tax Act (CGTA) at the flat rate of 10% 4 . Chargeable assets include:

• shares and stocks
• incorporeal property generally;
• any currency other than Nigerian currency; and
• any form of property created by the person disposing of it, or otherwise coming to be owned without being acquired,

Putting it in perspective, any form of property created by the person disposing of it, is wide enough to accommodate so many intangible assets such as goodwill and franchise rights. It is important to note that CGT is not enforced as a matter of course by the relevant tax authority. There are three conditions that must be met 5 :

• disposal of a chargeable asset;
• chargeable gains or profit must have been made from the disposal;
• the person that owns the asset or the asset is not exempted by the law.

A disposal of an asset will exist where any capital sum is derived from a sale, lease, transfer, an assignment, a compulsory acquisition or any other disposition of assets, notwithstanding that no asset is acquired by the person paying the capital sum.

CHARGEABILITY OF CGT ON SHARES, STOCKS, BONDS AND SECURITIES UNDER THE OLD LEGAL ORDER

As earlier stated, this article focuses on the application of capital gains tax to the profits or gains made from the disposal of shares of any company in Nigeria or government stocks, bonds, or securities. It is essential to examine the old legal order being the CGTA 2004 to gain a proper understanding of the paradigm shift in what constitutes the new legal order on tax liability of investors in the Nigerian capital markets, stocks, and shares. Capital gains tax was first introduced in Nigeria in 1967 as a federal law and has become part of the revenue generating statute till date. This was later compiled into the Laws of the Federation of Nigeria, 1990 and 2004 respectively; hence, the Capital Gains Tax Act (CGTA).

By the combined reading of Sections 2 and 3 of the CGTA, 2004, shares, stocks, and securities (except bonds, stocks and securities issued by the Federal Government) are subject to capital gains tax at the rate of 10%. However, in furtherance of its macro-economic policy, the Federal Government exercised its power under the Companies and Allied Matter Act (CAMA) and issued an exemption order from CGT in favour of duly registered companies in Nigeria. This exemption order 6 , which took effect from 2nd January 2012 expressly suspended the charging of CGT on all disposal of shares of companies duly registered under CAMA for a period of ten years from the commencement date. By effluxion of time, the 10-year exemption automatically lapsed on the 1st of January 2022.

Click here to continue reading . . .

1. The federal executive Council adopted the National Tax Policy (NTP) on the 7th February, 2018. By the content of the NTP, tax laws are meant to be reviewed in line with the macro-economic reforms of the federal government periodically.

2. In 2019, the Finance Act amended pursuant to Section 49 substituted a new section 32 of CGTA to the effect that transfers of shares in any re-organization of companies such as mergers and takeovers shall not be subject to capital gain tax.

3. See Federal Official Gazette No. 10 Vol 109 dated and published 18th January, 2022.

4. See Section 2(1) of the CGTA. The same rate is retained for disposal of shares in Section 2(3) of the FA 2021 which amended the provision of Section 30 of the CGTA

5. The federal High Court espoused the law in the case of United Investment Ltd v Attorney General of the Federation (1922 - 2014) 3 All NTC 207 at 221 – 222 to the effect that no capital gain tax is due if there was no disposal of asset under the CGTA.

6. The exemption is known as Companies' Income Tax (Exemption of Bonds and Short-Term Government Securities) Order, 2011 .

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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What is an Assignment of Debt?

By Vanessa Swain Senior Lawyer

Updated on February 22, 2023 Reading time: 5 minutes

This article meets our strict editorial principles. Our lawyers, experienced writers and legally trained editorial team put every effort into ensuring the information published on our website is accurate. We encourage you to seek independent legal advice. Learn more .

Perfecting Assignment

• Enforcing an Assigned Debt 

Recovery of an Assigned Debt

• Other Considerations 

Key Takeaways

Frequently asked questions.

I t is common for creditors, such as banks and other financiers, to assign their debt to a third party. Usually, an assig nment of debt is done in an effort to minimise the costs of recovery where a debtor has been delinquent for some time. This article looks at:

• what it means to ‘assign a debt’;
• the legal requirements to perfecting an assignment; and
• common problems with enforcing an assigned debt. 

Whether you’re a small business owner or the Chief Financial Officer of an ASX-listed company, one fact remains: your customers need to pay you.

This manual aims to help business owners, financial controllers and credit managers best manage and recover their debt.

An assignment of debt, in simple terms, is an agreement that transfers a debt owed to one entity, to another. A creditor does not need the consent of the debtor to assign a debt.

Once a debt is properly assigned, all rights and responsibilities of the original creditor (the assignor ) transfer to the new owner (the assignee ). Once an assignment of debt has been perfected, the assignee can collect the full amount of the debt owed . This includes interest recoverable under the original contract, as if they were the original creditor. A debtor is still responsible for paying the outstanding debt after an assignment. However, now, the debt or must pay the debt to the assignee rather than the original creditor.

Purchasing debt can be a lucrative business. Creditors will generally sell debt at a loss, for example, 20c for each dollar owed. Although, the amount paid will vary depending on factors such as the age of the debt and the likelihood of recovery. This can be a tax write off for the assignor, while the assignee can take steps to recover 100% of the debt owed. 

In New South Wales, the requirements for a legally binding assignment of debt are set out in the Conveyancing Act :

• the assignment must be in writing. You do this in the form of a deed (deed of assignment) and both the assignor and assignee sign it; and
• the assignor must provide notice to the debtor. The requirement for notice must be express and must be in writing. The assignor must notify the debtor advising them of the debt’ s assign ment and to who it has been assigned. The assignee will send a separate notice to the debtor, putting them on notice that the debt is due and payable. They will also provide them with the necessary information to make payment. 

The assignor must send the notices to the debtor’s last known address.  

Debtor as a Joined Party

In some circumstances, a debtor will be joined as a party to the deed of assignment . There can be a great benefit in this approach . This is because the debtor can provide warranties that the debt is owed and has clear notice of the assignment. However, it is not always practical to do so for a few reasons:

• a debtor may not be on speaking terms with the assignor; 
• a debtor may not be prepared to co-operate or provide appropriate warranties; and
• the assignor or the assignee may not want the debtor to be made aware of the sale price . This occurs particularly where the sale price is at a significant discount.

If the debtor is not a party to the deed of assignment, proper notice of the assignment must be provided.  

An assignment of debt that has not been properly perfected will not constitute a legal debt owing to the assignee. Rather, the legal right to recover the debt will remain with the assignor. Only an equitable interest in the debt will transfer to the assignee.  

Enforcing an Assigned Debt 

After validly assigning a debt (in writing and notice has been provided to the debtor’s last known place of residence), the assignee is entitled to take any legal steps available to them to recover the outstanding debt. These recovery options include:

• commencing court proceedings;
• obtaining a judgment; and 
• enforcement of that judgment.

Suppose court proceedings have been commenced or judgment already entered in favour of the assignor. In that case, the assignee must take steps to have the proceedings or judgment formally changed into the assignee’s name.  

In our experience, recovery of an assigned debt can be problematic because:  

• debtors often do not understand the concept of debt assignment and may not be aware that their credit contract contains an assignment of debt clause;
• disputes can arise as to whether a lawful assignment of debt has arisen. A debtor may claim that the assignor did not provide them with the requisite notice of the assignment, or in some cases, a contract will specifically exclude the creditor from legally assigning a debt;
• proper records of the notice of assignment provided to the debtor must be maintained. If proper records have not been kept, it may be difficult to prove that notice has been properly given, which may invalidate the legal assignment; and
• the debtor has the right to make an offsetting claim in defence to any recovery action taken by the assignee. A debtor may raise an offsetting claim which has arisen out of a previous arrangement with the assignor (which the assignee may not be aware of). For example, the debtor may have entered into an agreement with the assignor whereby the assignor agreed to accept a lesser amount of the debt owed by way of settlement. Because the assignee acquires the same rights and obligations of the assignor, the terms of that previous settlement agreement will bind the assignee. The court may find that there is no debt owing by the debtor. In this case, the assignee will have been assigned nothing of value. 

Other Considerations 

When assigning a debt, it is essential that the assignee, in particular, considers relevant statutory limitation periods for commencing proceedings or enforcing a judgment debt . In New South Wales, the time limit:

• to file legal proceedings to recover debts is six years from the date of last payment or when the debtor admitted in writing that they owed the debt; and
• for enforcing a judgment debt is 12 years from the date of judgment.

An assignment of a debt does not extend these limitation periods.  

While there can be benefits to both the assignor and the assignee, an assignment of debt will be unenforceable if done incorrectly. Therefore, if you are considering assigning or being assigned a debt, it is important to seek legal advice. If you need help with drafting or reviewing a deed of assignment or wish to recover a debt that has been assigned to you, contact LegalVision’s debt recovery lawyers on 1300 544 755 or fill out the form on this page.  

An assignment of debt is an agreement that transfers a debt owed to one entity, to another. A creditor does not need the consent of the debtor to assign a debt.

Once the assignee has validly assigned a debt, they are entitled to take any legal steps available to them to recover the outstanding debt. This includes commencing court proceedings, obtaining a judgment and enforcement of that judgment.

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• Insights & events

Assigning debts and other contractual claims - not as easy as first thought

Harking back to law school, we had a thirst for new black letter law. Section 136 of the Law of the Property Act 1925 kindly obliged. This lays down the conditions which need to be satisfied for an effective legal assignment of a chose in action (such as a debt). We won’t bore you with the detail, but suffice to say that what’s important is that a legal assignment must be in writing and signed by the assignor, must be absolute (i.e. no conditions attached) and crucially that written notice of the assignment must be given to the debtor.

When assigning debts, it’s worth remembering that you can’t legally assign part of a debt – any attempt to do so will take effect as an equitable assignment. The main practical difference between a legal and an equitable assignment is that the assignor will need to be joined in any legal proceedings in relation to the assigned debt (e.g. an attempt to recover that part of the debt).

Recent cases which tell another story

Why bother telling you the above?  Aside from our delight in remembering the joys of debating the merits of legal and equitable assignments (ehem), it’s worth revisiting our textbooks in the context of three recent cases. Although at first blush the statutory conditions for a legal assignment seem quite straightforward, attempts to assign contractual claims such as debts continue to throw up legal disputes:

• In  Sumitomo Mitsui Banking Corp Europe Ltd v Euler Hermes Europe SA (NV) [2019] EWHC 2250 (Comm),  the High Court held that a performance bond issued under a construction contract was not effectively assigned despite the surety acknowledging a notice of assignment of the bond. Sadly, the notice of assignment failed to meet the requirements under the bond instrument that the assignee confirm its acceptance of a provision in the bond that required the employer to repay the surety in the event of an overpayment. This case highlights the importance of ensuring any purported assignment meets any conditions stipulated in the underlying documents.
• In  Promontoria (Henrico) Ltd v Melton [2019] EWHC 2243 (Ch) (26 June 2019) , the High Court held that an assignment of a facility agreement and legal charges was valid, even though the debt assigned had to be identified by considering external evidence. The deed of assignment in question listed the assets subject to assignment, but was illegible to the extent that the debtor’s name could not be deciphered. The court got comfortable that there had been an effective assignment, given the following factors: (i) the lender had notified the borrower of its intention to assign the loan to the assignee; (ii) following the assignment, the lender had made no demand for repayment; (iii) a manager of the assignee had given a statement that the loan had been assigned and the borrower had accepted in evidence that he was aware of the assignment. Fortunately for the assignee, a second notice of assignment - which was invalid because it contained an incorrect date of assignment - did not invalidate the earlier assignment, which was found to be effective. The court took a practical and commercial view of the circumstances, although we recommend ensuring that your assignment documents clearly reflect what the parties intend!
• Finally, in Nicoll v Promontoria (Ram 2) Ltd [2019] EWHC 2410 (Ch),  the High Court held that a notice of assignment of a debt given to a debtor was valid, even though the effective date of assignment stated in the notice could not be verified by the debtor. The case concerned a debt assigned by the Co-op Bank to Promontoria and a joint notice given by assignor and assignee to the debtor that the debt had been assigned “on and with effect from 29 July 2016”. A subsequent statutory demand served by Promontoria on the debtor for the outstanding sums was disputed on the basis that the notice of assignment was invalid because it contained an incorrect date of assignment. Whilst accepting that the documentation was incapable of verifying with certainty the date of assignment, the Court held that the joint notice clearly showed that both parties had agreed that an assignment had taken place and was valid. This decision suggests that mistakes as to the date of assignment in a notice of assignment may not necessarily be fatal, if it is otherwise clear that the debt has been assigned.

The conclusion from the above? Maybe it’s not quite as easy as first thought to get an assignment right. Make sure you follow all of the conditions for a legal assignment according to the underlying contract and ensure your assignment documentation is clear.

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