CheckLists.Tax (beta)
K3. Release or write-off of loan/debt
GENERAL
Existence of a release
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- Satisfaction in kind is not release, but replacement with another debt/novation is release
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- Release does not include something that allows the company to effectively recover its money, including payment by a third party or consideration in kind provided (Collins v. Addies [1992] STC 746 at 749, Nourse LJ)
- Replacement of one debt with another debt is release of the original debt (Collins v. Addies [1992] STC 746 at 749, Nourse LJ).
- Meaning of novation: "A novation discharges the legal obligation of the original obligee and replaces it by a new obligation of a new obligee. It does not merely substitute a new debtor for the old in respect of the same debt or liability because as a matter of law it is not possible for a debtor to assign a legal liability." (Collins v. Addies [1991] STC 445 at 453, Millet J)
- "We accept that the contractual analysis demonstrates that the parties provided valuable consideration as between PHSW and Thermoline for the novation, substituting PHSW as creditor in the loan relationship with the Appellant. However, in financial terms Thermoline had not recovered its money and there remained an outstanding obligation from PHSW of the precise amount from which the Appellant had been released by Thermoline. In that sense there was substitution of one debtor for another. Further, we do not consider that the PHSW's liability to Thermoline could be said to satisfy the debt owed by the Appellant...Thus, on both 31 December 2020 and 16 March 2021 the amount of £512,713.89 remained outstanding to Thermoline with the consequence that Thermoline did not recover its money,thereby squarely meeting the conclusion in Collins." (Powell v. HMRC [2025] UKFTT 528 (TC), Judge Amanda Brown KC - query why it was not argued that the debt was, in reality, assigned)
Legislation: ITTOIA s.415(1); ITEPA 2003, s.188; CTA 2010 s.458;
Cases: Collins v. Addies [1992] STC 746; Collins v. Addies [1991] STC 445; Powell v. HMRC [2025] UKFTT 528 (TC);
HMRC manuals: CTM61605; (CFM11170)
Commentary:
See also:
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Not to be viewed restrictively or formalistically
"[112]...once the purpose of the provision is taken account of, that the exclusion of repayment and satisfaction transactions from the scope of “release” is not to be viewed restrictively or formalistically but should also encompass transactions which amount in substance to repayment or satisfaction." (Esprit Logistics Management Ltd v. HMRC [2018] UKFTT 287 (TC), Judge Raghavan)
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​​- Set-off via book entries does not amount to release
- "[113] Regarding the particular issues surrounding the relevance of set-off, there is no reason to suppose that where two mutually enforceable legal obligations to pay amounts due, are set off against each other that that would not amount as payment or satisfaction of the amounts outstanding." (Esprit Logistics Management Ltd v. HMRC [2018] UKFTT 287 (TC), Judge Raghavan)
- "You need not object to repayment via book entries if those entries reflect the underlying reality of a transaction and they are properly recorded in the company’s books (see the comments of Vinelott J in Minsham Properties Ltd v Price 63TC570 at page 585 beginning ‘there can be no doubt that a book entry can constitute payment’)...The indebtedness may be cleared by a credit of a dividend to the loan account." (CTM61600)
Legislation: ITTOIA s.415, CTA 2010 s.458
HMRC manuals: CTM61600;
Commentary:
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- Reducing indebtedness by way of employee bonus is not a release
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- "[117] Reading the board minutes as whole, together with the deed of release, they reflect, as HMRC argued, that there was an exchange of equal value: the company wanted to award the directors sums so they could pay off their loans, but instead of handing over the money only for it to be handed back to make the repayment, the company reduced the director’s indebtedness...The facts do fall into a scenario where the company “recovers its money” (in that bonus amounts that the company had indicated it would give no longer needed to be given, and therefore that such bonus commitments could be regarded as satisfied)" (Esprit Logistics Management Ltd v. HMRC [2018] UKFTT 287 (TC), Judge Raghavan)
- "[37]...However, the setting off of equal value and mutual financial obligations between the close company and the participator was accepted as payment and not a relevant release in Esprit (see paragraph 113 and 117)." (Powell v. HMRC [2025] UKFTT 528 (TC), Judge Amanda Brown KC)
- Employment tax on the sums awarded instead.
Legislation:
Cases: Esprit Logistics Management v HMRC [2018] UKFTT 287 (TC);
HMRC manuals:
Commentary:
See also:
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What is a writing off
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- Meaning of written off
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- HMRC say that release or writing off "means the borrower does not have to pay the lender" and is equivalent to waiver (EIM26101; EIM21741).
- "It is common ground that releasing and writing off are different operations for a company. A release is a final and conclusive act if completed according to law whereas the act of writing off by a company may not be. A debt which is written off may yet be recovered by a company if it discovers that the debtor's circumstances have changed so that it is no longer unable to repay the creditor company. A release is generally a transaction involving more than one person, whereas by its very nature an act of writing off by a company is unilateral." (Collins v. Addies [1991] STC 445, special commissioner)
- Liquidator accepting less than the full amount outstanding in full and final settlement of the debt is release/writing off (CTM61560).
Legislation:
Cases:
HMRC manuals: EIM21741; CTM61560;
Commentary:
See also:
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- Query whether liquidator leaving open possibility of reinstating company in future to collect debt means not written off
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- "Even if we take the ordinary meaning of the term, we do not agree that the actions of the liquidator in writing the Report and in dissolving BOH amount to an acceptance that the money has been lost or that a debt will not be paid. The liquidator states clearly in Liquidator Letter 1 that there was no formal write-off of the Director's Loan Balance. The prospect of a reinstatement of BOH in order that Mr Quillan should be pursued at some future point is unlikely but not impossible. It was within the power of the liquidator to either release or write off the loan, yet he chose to do neither. This leaves the Director's Loan Balance open to be pursued on behalf of BOH should that become appropriate at some point in the future. To suggest otherwise is to ignore the intentions of the liquidator's actions and the plain meaning of his language when he said that the Director's Loan Balance had not, in fact, been written off." (Quillan v. HMRC [2025] UKFTT 421, Judge Turner)
- HMRC's manuals take a different view: "Equally, where the liquidator does not write off or release the loan balance, but, on a balanced view of the facts, it is clear that the company and/or liquidator are not intending to pursue the outstanding loan, e.g. where they are not making any attempts to collect it or have given up any attempts to do so, then we should argue that the loan has been written off and that S415 ITTOIA05 should apply to the relevant amount." (CTM61560)
- Compare with the reference to a the liability being "released, extinguished, transferred or adjusted so as no longer to bind" in ITEPA 2003, s.446U.
Legislation:
Cases: Quillan v. HMRC [2025] UKFTT 421, Judge Turner;
HMRC manuals: CTM61560;
Commentary:
See also:
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INCOME TAX​
Trading
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- Money is trading stock of money lender
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- Singh: T carried on a trading of lending money, in the course of which he lent money to a company. The shareholders subsequently sued T claiming fraud, conspiracy etc. T sought to deduct the cost of defending the action.
- Held: deduction permitted.
- "They do not alter the main character of the action as being directed against the late Maharaja as the moneylender, and the latter's defence to the action was just as essential for the full protection of his rights as the creditor in the loan of Rs 10 lakhs as was his suit for the recovery of the loan. It has to be remembered that money is the stock-in-trade of a moneylender." (at 366).
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Legislation:
Cases:
ITC v. Singh [1942] 1 All ER 362 (UKPC);
HMRC manuals:
Commentary:
See also:
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Miscellaneous income
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- Query whether loan waiver by company can amount to income
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- Held not income in Kerrison v. HMRC [2019] UKUT 8 (TC):
"[71] In our judgment, the FTT was plainly correct to decide at [143] that the Loan Waiver did not result in a charge to income tax under s. 687(1) ITTOIA.
[72] We consider that the FTT was correct when it concluded at [143(1)] that the Loan Waiver was an entirely voluntary transaction...
...
[74] We also consider that the FTT was correct when it decided at [143(2)] that the Loan Waiver, as a one-off event, was capital rather than income in nature..."
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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Close companies
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- Charge on release or writing off of loan by close company to shareholder/participator
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- A company must be UK resident to be a close company.
- Does not matter whether company is close company at time of release or writing off (CTM61655).
- Applies to loans, advances and incurring a debt.
Legislation: ITTOIA s.415; CTA 2010, s.455;
Cases:
HMRC manuals: CTM61655;
Commentary:
See also:
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- Charge applies to loan to associate of participator
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Legislation: ITTOIA s.415; CTA 2010, s.455;
Cases:
HMRC manuals:
Commentary:
See also:
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- Does not generally apply to loans from non-resident companies
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- Does not matter if the company becomes UK resident after the loan is made.
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Legislation: CTA 2010, s.442;
Cases:
HMRC manuals:
Commentary:
See also:
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- Deemed release upon return of temporarily non-resident individual
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- Where loan etc. is released/written off while the debtor is temporarily non-resident, the release/writing off is treated as occurring upon return (ITTOIA s.420A).
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Legislation: ITTOIA s.420A;
Cases:
HMRC manuals: CTM61657;
Commentary:
See also:
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- Release after death
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- Separate charge applies if personal representative liability is released (ITTOIA s.419, s.664(2)(d))
Legislation:
Cases:
HMRC manuals: SAIM5200;
Commentary:
See also:
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Priority of charges
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- Other income tax charges usually have priority over employment charge
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- No charge under the benefits code/s.188 if the amount released is treated as income of the employee and liable to income tax (ITEPA s.189(1)).
- The benefits code/s.188 has priority over a charge under the termination of employment charge (ITEPA s.189(2)).
Legislation:
Cases: Esprit Logistics Management v HMRC [2018] UKFTT 287 (TC), §124;
HMRC manuals: EIM21746;
Commentary:
See also:
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- Loan to settlor that has been matched to income under settlements legislation
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- A loan to the settlor/spouse (or at their direction) is a capital sum to which income may be matched (ITTOIA s.633).
- To the extent that a loan has been taxed as income through such matching, if/when the loan is released only the balance (i.e. the part of the loan that has not been taxed as income) is treated as employment income under ITEPA s.188 (ITEPA s.189(3)).
- Accordingly, if the whole of the loan has been matched to income, there is no charge under s.188.
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Legislation:
Cases:
HMRC manuals: EIM21745;
Commentary:
See also:
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Settlements code
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- Release of loan to settlor/spouse (future matching under s.633 charge)
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- The loan itself to the settlor/spouse is a capital sum. Release of the loan is not a further capital sum.
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Release taxed as income
- If the release is treated as income under ITTOIA s.415, the amount treated as a capital sum for that loan is reduced by that amount (ITTOIA s.639).
- Query the position where it is taxed as employment income under ITEPA s.188.
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Release not taxed as income
- No reduction in the capital sum for the loan if the release is not treated as income.
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Legislation:
Cases:
HMRC manuals:
Commentary:
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EMPLOYMENT INCOME TAX
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General earnings charge
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- Charge to general earnings if release/writing off is 'from' employment
- Loan written off if employee served a period of time was general earnings for the year in which the obligation to repay lapsed in Clayton v. Gothorp 47 TC 168.
Legislation: ITEPA s.62
Cases: Clayton v Gothorp 47 TC 168
HMRC manuals: EIM01490; EIM21740;
Commentary:
See also:
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Benefits in kind charge
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- Charge to employment tax on release or write-off of employment related loan/debt​
- Treated as earnings from the employment for the year of release or writing off if employment still held.
- Employment treated as continuing if released or written off after termination.
- Applied to release of loans to relatives of employees unless employee derives no benefit from it (ITEPA s.174(5); EIM21741).
- See K1: Making a loan for whether a loan/debt is employment related.
Legislation: ITEPA s.188(1), (2);
Cases:
HMRC manuals: EIM21741;
Commentary:
See also:
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- Replacement loan made after termination treated as employment-related loan
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- If a loan is made after the employment has terminated and directly or indirectly replaced an employment-related loan (e.g. it is used to repay the original loan), the replacement loan is treated as an employment-related loan.
- Accordingly, release of the replacement loan will trigger the charge.
Legislation: ITEPA s.188(3)
Cases:
HMRC manuals: EIM21743;
Commentary:
See also:
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- No charge after death
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- Loan treated as discharged on death but the release charge does not apply.
Legislation: ITEPA s.190;
Cases:
HMRC manuals: EIM21742;
Commentary:
See also:
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- Dividend charge has priority over employment charge
- "[124] Were it necessary to decide to issue, I would not be satisfied HMRC's case demonstrated why it was the ITEPA provisions had priority despite the Chapter references in s366 which suggested otherwise." (Esprit Logistics Management Ltd v. HMRC [2018] UKFTT 287 (TC), Judge Raghavan)
Legislation: ITEPA 2003 s.366(3)
HMRC manuals:
Commentary: ​
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Termination payments charge
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- Other employment charges have priority
- ITEPA s.189(2)
Legislation: ITEPA s.189(2)
Cases:
HMRC manuals: EIM21744;
Commentary: ​
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- Release or extinguishment treated as discharge of notional loan under Chapter 3C leading to employment income
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- Where employment-related securities are acquired for less than market value but there is an outstanding or contingent liability to pay, the notional loan is treated as discharged when that liability is released, extinguished, transferred or adjusted so as no longer to bind any associated person (s.446U(1)(b)).
- This gives rise to employment income equal to the amount of notional loan outstanding (s.446U(2)).
- Employment income does not arise if the securities are disposed of together with the liability and the consideration reflects the transfer of the liability (s.446U(4)(aa)).
Legislation: ITEPA 2003, s.446U;
Cases:
HMRC manuals:
Commentary:
See also:
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Employment-related securities
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Disguised remuneration charge
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- Potential relevant step for disguised remuneration purposes​
- Releasing or writing off a loan/relevant debt is a relevant step (s.554C(1)(ab)).
- Loan includes any form of credit and a payment purported to be made by way of loan (s.554C(3A)).
Legislation: ITEPA s.554C;
Cases:
HMRC manuals:
Commentary:
See also:
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NICs
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- Can apply to release or writing off of loan to employee even if main charge is as a dividend
- Even though the dividend charge has priority over the employment charge, NICs may still be due if the loan was to an employee.
Legislation: SSCBA 1992 s.3(1);
Cases: Stewart Fraser Ltd v HMRC [2011] UKFTT 46 (TC);
HMRC manuals: CTM61660;
Commentary:
See also:
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CORPORATION TAX
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- Repayment of s.455 tax can be claimed
- Right to claim relief within 4 years of end of financial year in which release, writing off or repayment occurs (CTA 2010, s.458).
- Tax need not be paid if release, writing off or repayment occurs within 9 months of period in which loan made CTA 2010, s.458(4)).
- HMRC say loan and repayment do not need to be included in the tax return if within the same accounting period - the claim is implicit (CTM61600).
Legislation: CTA 2010, s.458;
Cases:
HMRC manuals: CTM61600;
Commentary:
See also:
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Loans to participators
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- No corporation tax debit where release treated as a distribution
- No CT debit where loan giving rise to s.455 tax released or written off (CTA 2009, s.321A).
- For other reasons why debit may be denied see CTM61655.
Legislation: CTA 2009, s.321A;
Cases:
HMRC manuals: CTM61655;
Commentary:
See also:
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- Debt within loan relationship rules: generally no debits and credits between connected companies
- General rule is that no impairment loss or release debit for creditor company if parties are connected companies (CTA 2009, s.354).
- Exception: swapping debt for equity where the equity causes the connection (CTA 2009, s.356);
- Exception: insolvent creditors (CTA 2009, s.357);
- Exception: deemed debits (CTA 2009, s.361 - 363);
Legislation: CTA 2009, s.353 - 363;
Cases:
HMRC manuals: CFM35320;
Commentary:
See also:
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No write back if subsequently become connected
"If the companies subsequently become connected there will be no write-back of impairment relief already given, but as a result of connection the debt will not attract further relief. The starting point will be the value of the debt in the accounts at the end of the accounting period preceding connection." (CFM35320)
Legislation:
Cases:
HMRC manuals: CFM35320;
Commentary:
See also:
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Intra-group release
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Companies not connected
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- Debit for release or debit denied if unallowable purpose
- Secured creditor not insisting on receiving the full amount to the benefit of the majority shareholders an unallowable purpose (Keighley v. HMRC [2024] UKFTT 30 (TC), §§130 - 137, Judge Popplewell).
Legislation: CTA 2009, s.441
Cases: Keighley v. HMRC [2024] UKFTT 30 (TC)
HMRC manuals:
Commentary:
See also:​
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