Impaired debt: acquisition of debt at a discount

Article by George Lovell, senior tax manager, and Bradley Keast, assistant tax manager, KPMG LLP (UK). This article appeared in the February 2006 issue of Tax Adviser.
When a company suffers financial difficulties, its ability to service its debt may suffer and the value of the debt it owes may fall below its nominal value as a reflection of the borrower's weaker credit-worthiness and the related uncertainty. 'Impaired debt' is the term given to debt whose market value is less than its nominal value. Depending on the severity of the financial difficulties, turning the company around frequently involves refinancing or a change in ownership, which may establish a connection between the parties to the loan. The tax treatment of the impaired debt in such exercises is an area of the loan relationship legislation that has caused tax professionals some concern for a long time.

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