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HMRC internal manual

Capital Gains Manual

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Qualifying corporate bonds: FA96: loan relationships

This guidance describes the capital gains aspects of the regime for Loan Relationships for companies from 1 April 1996 until the first accounting period to start on or after 1 October 2002. For periods beginning on or after 1 October 2002 see CG54100+

FA96 introduced substantial changes to the taxation treatment of debts. The paragraphs which follow deal solely with the changes that apply to debts held by companies with effect from 1 April 1996. Advice on the changes which apply to debts held by individuals, and other non-corporates such as trustees, is at CG54200+.

FA2002 amended the rules for corporate loan relationship rules for accounting periods beginning on or after 1 October 2002. Guidance on the CG aspects of these changes is at CG54100+.

The FOREX provisions in FA93 and FA95, see CG44000, removed most non-sterling debt held by companies from the scope of chargeable gains. The changes introduced by FA96 apply to loan relationships of companies, see CG54010. The combined effect of these provisions is to remove most debt held by companies from the scope of chargeable gains entirely. Instead, any profits or losses on redemption or other disposal of the debts are dealt with as income receipts or payments.

The new loan relationship rules specify the accounting treatment to be used for tax purposes to determine the credits and debits to be brought into the company’s tax computation. Where the loan relationship is held for trade purposes, the debits and credits go into the company’s Case I computation. Where the loan relationship is not held for trade purposes, the debits and credits go into the Case III computation. There is a new definition of Case III for companies and there are specific loss relief provisions where the net Case III result is negative. This could happen, for example, where a company made a loss on selling securities which are held as investments.

For advice on the Corporation Tax treatment of debts within the new regime from 1 April 1996, see CT12000+.

Transitional capital gains rules apply to debts which enter the new regime at 1 April 1996. These have the effect of preserving any chargeable gains or allowable losses which would have arisen on disposals of the debts on 31 March 1996.

Further detail on the capital gains aspects of the FA96 changes for corporates is given in CG54010-CG54090.