CTM06280 - Corporation Tax: company reconstructions: relevant liabilities restriction - examples
The following examples below illustrate the operation of the relevant liabilities restriction imposed by CTA10/S945 and outlined at CTM06250.
Example 1: transfer of a whole trade
Company A is in financial trouble after sustaining heavy losses and agrees to sell its business to company C.
Company C is unwilling to take over the bank loan and the creditors. So it is arranged that Company A sets up a wholly owned subsidiary, Company B, and transfers to it its leasehold premises, plant, goodwill, stock and employees for £450,000, which is left on loan account. Company A retains its cash on hand and at bank and the debtors. The unused CTA10/S45 carry forward losses at that date are £1,200,000.
Two weeks after company B began to carry on the trade company C buys its shares for £1 and enables company B to repay the loan of £450,000.
Company A's balance sheet on the day it ceased to carry on the trade stood as below.
| Assets | £ | Liabilities | £ |
|---|---|---|---|
Tangible assets |
£100,000 |
Creditors |
£ 1,500,000 |
Stocks |
£250,000 |
Bank loan |
£ 500,000 |
Debtors |
£500,000 |
Share capital |
£ 10,000 |
Cash |
£ 5,000 |
Profit & loss a/c |
£(1,155,000) |
Total |
£855,000 |
Total |
£ 855,000 |
Relevant liabilities restriction
Liabilities/ Assets retained |
£ |
£ |
|---|---|---|
Creditors |
£1,500,000 |
|
Bank loan |
£ 500,000 |
£2,000,000 |
Less Assets retained |
||
Debtors |
£ 500,000 |
|
Cash |
£ 5,000 |
£ 505,000 |
£1,495,000 |
||
Less consideration |
£ 450,000 |
|
£1,045,000 |
Company B is only entitled to losses of £155,000, that is, £1,200,000 minus £1,045,000.
Example 2:Â Â transfer of a part trade
The facts are as in Example 1 but company A only wishes to sell part of its trade to company C.
Company C is unwilling to take over the bank loan and the creditors. It is arranged that company A sets up a wholly owned subsidiary, company B, and transfers to it the plant, stock and employees relating to the part trade transferred, and the leases for the premises the part-trade occupies. Company A does not transfer any of the debtors, cash balances or liabilities. The sale price is £300,000. The unused CTA10/S45 carry forward losses of the part trade transferred at the date of transfer are £800,000.
Two weeks after company B began to carry on the trade, company C buys its shares for £1.
It is agreed that the following assets and liabilities should be apportioned to the transferred part trade:
| Assets and Liabilities | £ |
|---|---|
Creditors |
£900,000 |
Bank loan |
£350,000 |
Cash |
£ 2,000 |
Debtors |
£200,000 |
Relevant liabilities restriction
Liabilities/Assets retained |
£ |
£ |
|---|---|---|
Creditors |
£900,000 |
|
Bank loan |
£350,000 |
£1,250,000 |
Less assets retained |
||
Debtors |
£200,000 |
|
Cash |
£ 2,000 |
£ 202,000 |
£1,048, 000 |
||
Less consideration |
£ 300,000 |
|
£ 748,000 |
Company B is only entitled to losses of £52,000, that is, £800,000 minus £748,000.
The remaining losses of £748,000 do not revert to company A but are cancelled.