On 14 October 2009, the Government announced a major change to the way in which company buy-backs of debt will be taxed. The change may be relevant to any corporate debt buy-back where debt is being purchased back by the group at less than face value, including in a securitisation or a commercial refinancing.

The global financial crisis has resulted in many loans trading at below par value. This presents groups with an opportunity to purchase their own debt and, therefore, extinguish the debt at a reduced cost.

The tax treatment of loans issued by a company follows the company's accounting treatment. If a company buys back its own debt it will extinguish that debt and the accounts will show a profit as the purchase price will be less than the book value of the debt. This accounting profit will be subject to UK corporation tax in the company's hands. Where an impaired debt is sold to a person connected with the borrower there is a deemed release of the impaired part of the debt (taxable on the borrower) so as to achieve tax symmetry between the borrower and the original lender (who can deduct the impairment).

The announced change is targeted at a perceived loophole in the legislation which provided an exemption from the deemed release charge for corporate rescues of companies in financial difficulties. It was possible to set up a new company within the borrower group and use that new company to buy back group debt at a price less than face value. This would not have resulted in a tax charge because the debt would not be extinguished when purchased by a person other than the issuer. If the purchasing company was resident in the UK for tax purposes it would ultimately be subject to UK corporation tax on the difference between the amount paid for the loan and the eventual repayment amount. However, as the debtor and creditor would be connected, it was often possible for the debt to be written down and repaid at cost or waived without any tax charge arising. Also, if the purchasing company was not resident in the UK, a UK tax charge could generally be avoided.

With effect from 14 October 2009, "only those debt buy-backs that are undertaken as part of genuine corporate rescues will benefit from buy-back profits not being subject to tax". However, the wording of the announcement means that many commercial buy-backs could be affected.

The proposed changes introduce three conditions so that to avoid the tax charge:

Further details of the change were given in an HMRC release dated 21 October 2009. This included confirmation that "change of ownership" will mean, broadly, a change in the ultimate ownership of more than 50% of the shares in the borrower. Grandfathering rules will save transactions which were partly implemented at 14 October – the new rules will not apply if the offer to acquire the debt was made on or before 14 October 2009. There will also be an exemption from deemed release treatment where a group refinances its debt by issuing new debt.