Lisa Lokasto

We are seeing more land and development transactions coming back to play. Many of these carry a history of restructurings, loan settlements, or bank debt write downs from the Celtic tiger era.

A common assumption is that debt is just financing, so any write-off is to be ignored from a tax perspective. We’ve seen situations where the issue was never raised by a previous adviser and , understandably, clients themselves wouldn’t know it’s a key issue for the tax.

In many cases historic debt write-offs can significantly reduce the tax losses and in some cases, actaully create new taxable income.

Debt write off may limit losses

When a lender writes off part of a loan that was used to acquire or develop property, tax rules may limit the capital losses that can be claimed on a future sale. So if an transaction is happening today, it’s absolutely key to understand the historical financing.

From a commercial perspective, this does makes sense. If a borrower is absolved from repaying part of the debt, the tax system generally won’t allow full relief for a loss that hasn’t actually been fully suffered economically.

Once historic debt settlements are taken into account, the losses available may lower than expected as a restriction can apply where a loss would otherwise arise. If a gain arises on a sale today and you intend to rely on carried forward losses, it’s important to understand whether any restriction applies. If Revenue later revisits the position and reduces the losses claimed, the tax exposure can be huge given the size of these transactions. It’s worth getting this right.

Timing matters

Another often overlooked issue is when a debt write-off happens.

If a property is sold first and the loan is only written off later, a large loss might initially seem to be available. But a later write-off can effectively claw that back. That’s a problem if those losses were used. You’re probably wondering how you sell a property with a loan in place. Well, how this comes up is you’ll have a distressed borrower, a lender may agree to release its security so the property can be sold, with all sale proceeds going directly to the bank of course. But the formal debt write-off may only be documented later as part of a wider settlement. This can take a long time to get agreed and at that time, it’s important to understand potential adjustments any such agreement will trigger on the tax side.

Developers, stock and Trading Write offs

We’re talking now about where debt write-offs can actually be taxable, in certain circumstances.

Where a trade deduction is taken for debt incurred and the debt is subsequently written off, the amount of the write off is treated as a trade receipt.

How this comes up would be, for example, stock is purchased on credit and a deduction is taken in computing the trade profits (the stock just goes through the profit and loss as purchases in COS). The creditor or the stocking loan is then subsequently written off. This would be a trade receipt, meaning it’s taxable.  

If amount is written off after discontinuance of trade treated as post-cessation receipt. Again, taxable.

For Developers (we’re talking about individual developers here), loans to acquire/develop land that are subsequently wrote off are also treated as a case I receipt, meaning it’s taxable income.

This all feels very counterintuitive, a business is struggling, the bank reduces the debt, yet the tax rules treat that reduction as a taxable receipt. The key point is that it isn’t just future loss restrictions, debt-write off itself can trigger income tax in certain circumstances. Again, commercially does make sense. A trade reduction has already been claimed on these, so it’s essientally a “claw back” of the earlier tax relief.

These details often only surface long after the restructuring has been agreed.

Connected-Party Loans

Sometimes legacy projects were funded partly through shareholder or related-party loans. Write-offs on those balances can also have different consequences from a bank settlement, including potential CAT issues if not structured carefully.

This is an area that tends to get overlooked in commercial negotiations but can create unexpected exposures later.

Why This Is Becoming More Relevant Now

As older developments are redeveloped or brought to market, the history behind those them becomes important. If you’ve been in the sector for any length of time, there’s a good chance there has been some level of engagement with lenders along the way. It’s helpful to work with a tax adviser who understands that full background and can look at the full picture. If Revenue were to come back later, as I say, the amounts involved can be significant so it’s worth getting the analysis right from the start.

If any of the issues raised sound familiar, or if you’re currently planning a sale, refinance or redevelopment, feel free to get in touch.

Request a Consultation – Lisa Lokasto

Lisa.