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Debt forgiveness: implications for property

Calculating With Coins Stack And Paper House And Notepad

Since the property crash a considerable number of borrowers have been offered the opportunity by their lenders to repay their loans at a compromised amount. This is often known as ‘debt forgiveness’. In this article, I look at the implications for the sector.

Tax charge on debt forgiveness

Any debt forgiveness or discount secured is potentially taxable in the hands of the borrower. For example, if a debt of £2m is owed but is reduced by agreement to £1m, a significant tax charge could apply on the sum which has been compromised – £1m in this example.

It is clear that this could cause significant cashflow issues as the funding of this tax charge is often overlooked.

Corporate rescue exemption

The exemption introduced by The Finance (No. 2) Act 2015 simplifies the way to avoid a tax charge on debt forgiveness. Put simply, if it is reasonable to assume that the borrower has no realistic prospect of repaying its debt within 12 months following the release or modification of the debt then the tax charge may not apply.

Take advice

No company should enter into a debt forgiveness arrangement without professional advice. If HMRC disagree there is no going back.

For further information on this subject please contact Stuart Stead, partner and head of property and construction Sector at Cowgill Holloway. David Rainford, property finance director at Cowgill Holloway has unrivalled experience in the property funding sector. Both can be contacted on 01204 414243.

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