Interaction between debt write downs and Capital Gains Tax

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debt writedown

New rules have come into force restricting the amount of capital losses available on disposals where there has been a debt write down.

Since 1 January 2014 new legislation aims to ensure that only the economic loss on disposals is available against capital gains in situations where there has been debt forgiveness.

Under the old rules, if you disposed of an asset for €1 million, which originally cost you €2 million (all purchased through bank finance) then you had a capital loss of €1 million which could be used against future gains. This was the case irrespective of whether the €2 million bank loan was partially forgiven by the bank.
From 2014, if your €2 million loan was written down to €1.5 million and you sold the asset for €1 million the CGT loss would only be €500,000, i.e. your economic loss.

While this new legislation does seem fair and equitable, problems can arise where you dispose of the asset now but do not receive the debt write off until sometime in the future. Where debt is released after the year of disposal, the capital loss is not amended, however there is a chargeable gain deemed to arise in the year of the write off. An example will best explain this:

John disposed of an asset for €1 million in 2014. It originally cost him €2 million. He purchased the asset using bank borrowings. In 2014 he has a capital loss of €1m which he can use against other gains going forward.
In 2016 the bank write off €1 million of the loan. Instead of amending the losses in 2014, Revenue will view the write off to be a chargeable gain in 2016 of €1 million. The 2014 losses can be set against this, if not already used. However if they have been used then John has a €330,000 CGT liability arising from an asset disposed of in 2013.

The purpose of this article is to highlight the additional issues which can arise when a person or company receives a debt write off. It is important to contact your advisor in relation to debt forgiveness in order to get advice as to what implications the write off will have from a taxation point of view.

By Dave O’Brien, Tax Manager, Quintas
For further information contact Quintas on +353 (0)21 4641400 or email info@quintas.ie

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