A £150 million loan relationship deduction. A Guernsey SPV migrating to the UK as part of a care home disposal. HMRC arguing the whole loss accrued before the company ever became subject to UK tax. The Upper Tribunal’s decision in UK Care No. 1 Ltd v HMRC [2026] UKUT 00090 (TCC) is a textbook illustration of a risk that sits in almost every cross-border acquisition structure — and one that most finance teams underestimate until they are staring at a corporation tax adjustment.
If your group has ever acquired an offshore SPV, migrated a holding company to the UK, or used a non-resident entity to issue loan notes into a UK operating business, read this carefully. The imported loss rules are not an obscure technical curiosity. They are a permanent fixture of the corporate finance manual and, as this case shows, HMRC will use them aggressively when the numbers are large enough to justify the fight.
What the Imported Loss Rules Actually Say
Section 327 of the Corporation Tax Act 2009 disallows a loan relationship debit to the extent it is referable to a period when the company’s loan relationship was not subject to UK taxation. The policy rationale is straightforward: HMRC will not allow a UK tax deduction for losses that accrued offshore, outside the UK tax net. The provision applies on an amortised cost basis — companies using fair value accounting are not caught, which is itself a planning consideration worth noting.
The practical problem is that “referable to a pre-migration period” is not defined in legislation. Parliament left tribunals to work out what it means as a matter of commercial reality. And commercial reality, as any experienced CFO knows, is a phrase that can cut in multiple directions depending on how you frame the facts.
The Facts of UK Care No. 1 Ltd: A Disposal That Went Wrong for HMRC
UK Care No. 1 Ltd (UKC1) was incorporated in Guernsey and operated as a special purpose vehicle, issuing loan notes to fund a UK care home business. In 2016, when part of the care home portfolio was sold to the BUPA Group, UKC1 was acquired by BUPA, became UK tax resident, and shortly afterwards redeemed the loan notes early. That early redemption triggered an accounting loss of approximately £150 million — a figure that comprised three distinct elements:
- Compensatory element (~£90 million): The difference between the outstanding principal and the market value of the notes, compensating investors for lost future cash flows from the point of redemption.
- Penalty element (~£56 million): A contractual early redemption penalty — essentially a breakage fee.
- Unamortised discount and issue costs (~£4 million): The remaining unamortised portion of the original discount on issue and the transaction costs incurred when the loan notes were first established.
HMRC’s position was that substantially all of this loss was an imported loss under s.327 — pre-migration in origin, and therefore not deductible against UK corporation tax. The First-tier Tribunal agreed with HMRC on most of it, disallowing the compensatory element and the unamortised costs, while allowing the penalty element through. UKC1 appealed to the Upper Tribunal on the remaining items.
What the Upper Tribunal Decided — and Why It Matters
The Upper Tribunal’s decision, published in February 2026 and available via BAILII, is significant for three reasons.
First, on the definition of “loss”: UKC1 argued that s.327 only catches losses in the strict accounting sense, not expenses. If expenses were excluded, the unamortised issue costs and discount — which are technically expenses — would fall outside the restriction entirely. The Upper Tribunal rejected this, confirming that s.327 uses “loss” in a broad sense encompassing expenses that form part of an overall computational debit. This matters because it closes what might otherwise have been a straightforward escape route for any migrating company with unamortised debt issuance costs on its books.
Second, on the unamortised costs: The Upper Tribunal departed from the First-tier Tribunal on the £4 million of unamortised issue costs and discount. It held that the FTT had erred in finding these were referable to the pre-migration period. The correct analysis, said the UT, was to assess commercial reality: these costs were economically sensible to spread over the life of the loan. They were not a loss that had “accrued” before the company arrived in the UK — they were financing costs that belonged to the full term of the instrument, including the post-migration period. The UT therefore allowed this portion of the deduction.
Third, on the compensatory element: The UT upheld the FTT’s disallowance. The £90 million compensatory payment reflected the increase in market value of the notes during the period before migration — a value accretion that occurred offshore, outside the UK tax net. As a matter of commercial reality, that loss was squarely referable to the pre-migration period. No deduction was available.
KPMG’s commentary highlights the practical distinction the UT has now established: a loss arising from market value movements during the pre-migration period is an imported loss; a financing cost that is economically spread over the loan’s contractual term is not, even if the contractual obligation was created before migration.
Why This Is a Live Risk in Every PE Deal and Cross-Border Restructuring
Private equity acquisition structures almost always involve offshore SPVs. Luxembourg HoldCos, Jersey FinCos, Cayman intermediate holding vehicles — these are standard architecture in UK-targeted buyouts. Loan notes issued at the acquisition stage typically carry complex economic terms: original issue discount, arrangement fees, PIK interest, make-whole provisions, and early redemption premiums. All of these can generate significant debits if the financing is restructured, refinanced, or unwound as part of an exit or disposal.
The moment any of those SPVs becomes UK tax resident — whether through a buy-in, a tax residency change, or a disposal structure that requires migration — the s.327 clock starts. Any unrealised losses on the loan relationship at the point of migration become potentially restricted. And as UK Care No. 1 demonstrates, HMRC will identify and challenge those losses if the amounts are material. They did it here for a £90 million compensatory deduction, and they will do it again.
The HMRC Corporate Finance Manual at CFM33250 sets out HMRC’s working interpretation of s.327 and is worth reading alongside the tribunal decisions to understand the ground on which any challenge will be fought. The manual’s framework — focusing on when losses “arise” as a matter of commercial reality — is exactly what the UT applied, with results that were more nuanced than a straightforward “all pre-migration losses are disallowed” approach.
The Accounting Policy Escape Hatch
There is one significant planning point that this case reinforces. Section 327 does not apply where a company uses fair value accounting for its loan relationships. A company that marks its debt instruments to fair value will, by definition, have already recognised any market value movements through its profit and loss account — there is no “locked-in” unrealised loss to import. The restriction exists precisely because amortised cost accounting allows losses to build up without recognition. If your structure uses fair value for the relevant loan relationships, the imported loss problem largely disappears.
This is not a simple solution — fair value accounting for loan relationships has its own complexities, including volatility in reported profits and differences between accounting and tax bases that can create other problems. But for structures where a migration event is anticipated, it is worth modelling both approaches before finalising the accounting policy. IFRS 9 gives some flexibility on classification that can make fair value treatment available where the business model supports it.
Decomposing the Debt: The Most Valuable Lesson from UK Care
The most practically useful output from this decision is the UT’s confirmation that different components of a loan relationship can be treated differently under s.327. The penalty element was allowed through at the FTT stage. The unamortised costs and discount were allowed at the UT stage. The compensatory element remains blocked. This is not an all-or-nothing analysis.
What that means for a CFO facing a migration event — or reviewing an acquisition that has already occurred — is that the right response is granular decomposition of the debt instrument, not a binary determination of whether s.327 applies. Each element of the loan needs to be assessed on its own commercial reality:
- Is this element economically attributable to market movements that occurred before migration? If yes, it is likely blocked.
- Is this element a financing cost that is economically spread over the contractual life of the instrument? If yes, the post-migration portion should be deductible.
- Is this element a contractual penalty triggered by the post-migration decision to redeem? If yes, it should be fully deductible — this is exactly what happened with the £56 million penalty element in UK Care.
Claritax News has a useful technical summary of how the FTT and UT approached the “referability” question and is worth reading for anyone preparing a technical analysis of a specific fact pattern.
Six CFO Actions Before Your Next Cross-Border Restructuring Closes
1. Map every loan relationship in the structure before any migration event. This means not just the headline principal amounts but the full economic terms — OID, arrangement fees, PIK interest, make-whole provisions, and redemption premiums. Every deferred or unamortised cost is a potential s.327 analysis point.
2. Quantify the market value of each instrument at the migration date. The compensatory element in UK Care was blocked because it reflected pre-migration market value accretion. If you cannot demonstrate the market value at the migration date with reliable evidence, HMRC will estimate it — and their estimate will not be conservative.
3. Review accounting policy for the relevant instruments. If fair value accounting is available under s.349 CTA 2009 and consistent with the group’s financial reporting framework, model the tax outcome under both amortised cost and fair value before committing. This is a decision that should be made before migration, not after.
4. Obtain independent valuations for complex instruments. Loan notes with embedded derivatives, make-whole clauses, or PIK toggles are difficult to value at a point in time. If you are asserting that only a limited portion of a loss is referable to the pre-migration period, you need a defensible valuation that will stand up to HMRC scrutiny. Tribunal evidence standards apply.
5. Consider the timing of any refinancing or redemption. A redemption that happens immediately after a migration event — as in UK Care, where the loan notes were redeemed shortly after UKC1 became UK resident — is exactly the fact pattern that HMRC targets. If a refinancing is inevitable, consider whether the structure can be arranged so that the redemption occurs before migration, or the migration is deferred until after a refinancing that avoids crystallising a market value loss.
6. Review historical acquisitions for open years. If your group has acquired offshore SPVs in the last six years and those entities subsequently became UK resident, check whether any loan relationship debits were claimed in the CT return without a s.327 analysis. HMRC has a 20-year time limit for discovery assessments where behaviour amounts to deliberate non-disclosure. An omission is not the same as deliberate behaviour — but the absence of any analysis is a gap worth closing now rather than at enquiry stage. CTM34070 covers HMRC’s approach to discovery in the corporate tax context.
The Broader Loan Relationships Landscape in 2026
UK Care does not stand alone. HMRC has been systematically pursuing loan relationship cases at both tribunal levels throughout 2025 and 2026. The unallowable purpose rules under s.441 CTA 2009 and the transfer pricing provisions are all being deployed against large intercompany financing arrangements. The message from HMRC is consistent: complex cross-border debt structures are a high-priority audit target, and they will resource the litigation if the numbers justify it.
CFOs who treat loan relationship compliance as a filing formality rather than a substantive analysis exercise are taking a risk that is increasingly likely to materialise. The technical rules are complex, the factual analysis is intensive, and the tribunal record shows that outcomes turn on granular details of how instruments were structured and how losses are characterised. That is specialist territory, and it requires specialist resource.