541 Debts

Summary

A debt is an asset for capital gains tax purposes (section 532(b)). However, where an original creditor disposes of a debt no chargeable gain or allowable loss arises on the disposal. This treatment also applies where the disposal of the debt is made by the original creditor’s personal representative or legatee. It follows, therefore, that only debts which have been purchased from the original creditor (or his/her personal representative or legatee) are regarded as chargeable assets.

The treatment outlined above does not apply to a debt on a security within the meaning of section 585. The term “security” as set out in that section includes any loan stock or similar security of any government or of any public authority or of any company, whether secured or unsecured, but excludes securities within section 607 (for example, Irish Government stocks, loan stocks of Irish local authorities, etc.).

Details

Gain on disposal of debt by original creditor not chargeable

(1)(a) A chargeable gain does not accrue on a disposal of a debt by the original creditor or his/her personal representative or legatee. Thus, an original creditor cannot get relief on the creation of capital losses by the assignment of bad debts for a small sum.

(1)(b) The above rule does not apply to debts in the form of loan stock of a government, public authority or a company, and such debts are dealt with under the ordinary rules of disposal. (Certain Government and other securities are, however, exempt from capital gains tax under section 607).

Transfer of debt in the course of a merger or division under the Companies Act 2014

(1A) For the purposes of subsection (1)(a), a successor company will be deemed to be the original creditor in respect of a debt where that debt is transferred from a transferor company to a successor company in the course of a merger or a division under the Companies Act 2014 and the transferor company was the original creditor in respect of the debt.

Satisfaction of debt by creditor (other than original creditor)

(2) The satisfaction of a debt or part of a debt is treated as a disposal by a creditor (other than the original creditor) thus giving rise to a chargeable gain or an allowable loss. This general rule is subject to subsection (1) and to the treatment in sections 585 and 586 that certain conversions of securities or issues of shares or debentures by a company on an amalgamation in exchange for other shares or debentures do not constitute disposals.

Property acquired in satisfaction of debt

(3) When a debt (or part of a debt) is satisfied by the acquisition of property by a creditor, the property is not treated as having been disposed of by the debtor or acquired by the creditor for an amount greater than its market value at the time of the acquisition in satisfaction of the debt, irrespective of the value of the debt. However, where an original creditor acquires property in satisfaction of a debt and later disposes of it making a chargeable gain, the amount of the chargeable gain is not to be greater than the gain which would have resulted if the base cost of the original creditor’s acquisition were the amount of the debt (or its part) and not the market value of the property. This adjustment ensures that an original creditor is not treated as making a chargeable gain unless the amount received exceeds the amount of the debt.

Loss on disposal of debt acquired from connected person

(4) An original creditor (or his/her personal representative or legatee) cannot get relief for a loss by transferring a debt on which a loss is likely to arise to a person connected with the original creditor (or his/her personal representative or legatee). This measure also applies to a series of purchases directly or indirectly through a number of connected persons.

Trustees

(5) The exemption in subsection (1) and the loss provision in subsection (4) are extended to cover the remainderman where the original creditor is a trustee and the debt is settled property. A disposal by the remainderman or his/her representatives on becoming absolutely entitled as against the trustee to the debt on its ceasing to be settled property will therefore not be liable to charge nor can it give rise to an allowable loss.

Bank balance in foreign currency

(6) Provision is made to prevent the application of the section so as to exempt gains derived from currency speculation. Foreign currency lodged to a bank account would apart from this provision represent a debt due to an original creditor and gains on conversion would not be chargeable were it not for this provision. The section applies, however, if the currency is for personal expenditure outside the State by a person, his/her family, dependants or civil partner or any child of his or her civil partner.

Bank balance in foreign currency transferred to another bank account held by the same person

(6A) Provision is made to prevent the situation whereby the same foreign currency transferred between bank accounts held by the same person would apart from this provision crystallise a chargeable gain or an allowable loss without an accompanying economic capital gain or loss. It provides that transfers between accounts of the same person in the same foreign currency do not give rise to a gain or a loss. The base cost of that foreign currency for capital gains tax purposes will be its original base cost, i.e. the cost of the foreign currency before any transfers between bank accounts of the same person took place. This provision applies to disposals on or after the passing of the Finance Act 2020.

Issue of certain debentures treated as a security

(7) Provision is made to put beyond doubt that in certain specified circumstances a debenture issued by a company is a security within the meaning of section 585. Hence the disposal of such a debenture constitutes a chargeable event for the purposes of capital gains tax.

The specified circumstances are where the debenture —

• (7)(a) is issued on foot of a reorganisation of share capital (that is, in an amalgamation, take-over, etc) as provided for in section 584(2),
  [Section 584(2) describes what constitutes a reorganisation of a company’s share capital. Basically, it arises where a person, whether for payment or not, is allotted shares in, or debentures of, a company in proportion to the person’s holding of shares in the company. It can also arise where there is more than one class of shares and the rights attached to shares of any class are altered.]
• (7)(b) is issued in exchange for shares in, or debentures of, another company where the requirements of section 586(2) are satisfied in relation to the exchange,
  [Section 586(2) provides that where a company issues shares or debenture to a person in exchange for shares or debentures of another company section 584 applies as if the 2 companies were the same company. Section 586 only applies where the company issuing the shares or debentures has, or will have, control of the other company or the issue results from a general offer made to members of the other company.]
• (7)(c) is issued under any arrangements referred to in section 587(2),
  [Section 587(2) provides that where a company reorganisation takes place and shareholders of the company are issued with shares and debentures of another company in respect of their original shares or debentures but those original shares or debentures are either retained by the shareholders or cancelled, the new shares or debentures will be treated as if they were the original shares or debentures.]
• (7)(d) is issued in connection with any transfer of assets referred to in section 631,
  [Section 631, which is concerned with implementation of the EU Council Directive on the Common System of Taxation applicable to Mergers, Divisions, Transfers of Assets and Exchanges of Shares concerning Companies of Different Member States (“the Mergers Directive”), applies where a company transfers a trade carried on by it in the State to another company in exchange for securities in that other company.]
• (7)(e) is issued in connection with any disposal of assets referred to in section 632,
  [Section 632, which is also concerned with implementation of the Mergers Directive, applies in the case of the transfer of assets by a company to its parent company.]
• (7)(f) is issued in the course of a transaction which is the subject of an application under section 637,
  [Section 637, which again concerns the implementation of the Mergers Directive, deals with transactions of a type specified in the Directive to which Part 21 of the Taxes Consolidation Act does not apply.]
• (7)(g) is issued in pursuance of rights attached to any debenture covered by paragraphs (a), (b), (c), (d), (e) or (f) above. The purpose of this provision is to ensure that the provisions of those paragraphs are not subject to tax avoidance devices whereby a taxpayer could claim not to have received a debenture in exchange for shares on an reorganisation, etc, but in fact receives benefits on foot of a debenture issued pursuant to the reorganisation, etc.

(8) Paragraphs (d), (e) and (f) of subsection (7) and, in so far as it relates to debentures covered by those paragraphs, paragraph (g) of subsection (7) apply as respects the disposal of a debenture on or after 26 March, 1997.

Relevant Date: Finance Act 2021