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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Qualifying corporate bonds: loan relationships: chargeable assets

FA96/S93

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/S93 excludes from the new regime the profit or loss on redemption or other disposal of a loan relationship where the amount which has to be paid to discharge the debt (whether on redemption or otherwise) is calculated by applying a relevant percentage change in the value of chargeable assets to the amount of the original loan. Such a loan relationship is referred to as an “asset-linked security”.

A CHARGEABLE ASSET, for this purpose, is an asset where a gain on disposal by the company in question on or after 1 April 1996 would be a chargeable gain, on the assumption that it was not a disposal in the course of a trade. Gains accruing under TCGA92/S116 (10), see CG53820+, are to be disregarded. The range of “chargeable assets” was amended in FA2002/S74 for accounting periods ending on or after 26 July 2001. From that date a loan relationship is only an asset-linked security if it is linked to land (or an interest in land) or to qualifying ordinary shares listed on a recognised stock exchange.

A RELEVANT PERCENTAGE CHANGE refers to the percentage change in the value of the chargeable assets, or any index of the value of those assets, over (broadly) the life of the loan.

The retail prices index (RPI), and any similar general index published by or on behalf of any other government is not treated as an index in the value of chargeable assets, FA96 S93 (13). So debt linked to such an index may still fall to be dealt with wholly within the income regime.

FA96/S93 does not apply in cases where a disposal of the asset by the company would be treated as an integral part of its trading activities.

For further advice on the detailed interpretation of FA96/S93, see the CT manual.

Following the amendments in section 74 FA2002, loan relationships linked to assets other than land or qualifying listed shares, which would previously have been within section 93 FA1996, are within the main loan relationship regime from 26 July 2001. Guidance on the amendments to section 93 FA1996 and the operation of that section after the amendments is at CFM5900+.

Because their value will reflect the value of the underlying shares or other assets to which they are linked, only amounts relating to interest on these debts are brought into the income regime. Any profits or losses on disposal remain to be dealt with under capital gains rules. These rules are, however, modified as described below to ensure that gains on debts within FA96/S93 are always chargeable.

TCGA92/S251 (7) and TCGA92/S251 (8) ensure that where the disposal of a debt within FA96/S93 gives rise to a gain, the debt is treated as a security. So the exemption for simple debts in TCGA92/S251 (1) does not apply in these cases. See CG53445+.

Any charge, or allowance, on disposal would also be lost if the debt was a QCB. This is prevented by FA96/S93 (4) and TCGA92/S117 (A1). The combined effect of these Sections is that the debt is not treated as a QCB.

When computing any chargeable gain or allowable loss you should adjust the consideration for the acquisition or disposal of the debt to exclude any amounts which relate to interest. This applies also to events which would have been an acquisition or disposal but for TCGA92/S127 or TCGA92/S116 (10).