While this is often true, relying on that assumption without considering the wider rules can potentially lead to unexpected tax consequences.

In broad terms, tax-neutral treatment means that the borrower is not taxed on the loan released, while the lender cannot claim tax relief for the corresponding loss. The overall effect is that the write-off is effectively disregarded for corporation tax purposes in both companies, thereby being ‘tax neutral.’

However, this treatment does not always apply. The debt must fall within the loan relationship rules, which generally require it to be a genuine money debt arising from the lending of money. But not every loan between connected companies will meet these conditions.

For example, long-standing intercompany balances that were never intended to be repaid, or amounts arising from other transactions rather than a loan, may fall outside the rules. Where this happens, the borrower could face a corporation tax charge while the lender may receive little or no tax relief.

It is also important not to assume that companies are "connected" simply because they are owned by members of the same family. The tax definition of connected companies is narrower than many expect, and loans between family-owned companies may not qualify for tax-neutral treatment.

Even where the corporation tax position is neutral, another issue may arise. Writing-off a loan can amount to a distribution of value from one company to another. In a 100% group structure this will not often have no additional tax cost, but where companies are under common ownership without forming a group, the write-off may result in the shareholders being treated as receiving a taxable distribution personally.

There are also legal and accounting considerations. A company generally needs sufficient distributable reserves before releasing a debt, and failing to meet these requirements could result in an unlawful distribution.

Ultimately, writing off an intercompany loan should never be viewed as a routine administrative exercise. The tax treatment depends on the nature of the debt, the relationship between the companies and the ownership structure. Taking advice before writing off significant intercompany balances can help avoid unexpected tax liabilities and ensure the transaction is carried out in the most appropriate way.

Here at Rickard Luckin, we have the tax expertise and experience to advise on these matters. If you would like our assistance, please get in touch.

Disclaimer: This blog post is for general information only and should not be construed as tax advice. Please call us for personalised guidance on your specific situation.