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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: transitional: overview

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+

Most foreign currency debt held by companies was removed from the scope of chargeable gains by the FOREX provisions in FA1993 and 1995, see CG44000. Some categories of debt remained within the scope of chargeable gains but most of these are removed by the FA96 provisions on loan relationships. The main categories are

  • foreign currency denominated debt convertible into shares, where these are not within FA92/S92 (for example, debt with spurious or non-valuable conversion rights)
  • sterling debt issued on non-commercial terms
  • debt held by persons other than the original creditor.

FA96/SCH15/PARA8 provides transitional rules for computing chargeable gains or allowable losses up to 31 March 1996 on corporate debts which are dealt with wholly within the income regime from 1 April 1996.

Very broadly, the rules operate on the first disposal of the debt after 31 March 1996. Any chargeable gain or allowable loss which would have arisen if the debt had been disposed of on 31 March 1996 is computed and brought into account for the period in which the disposal occurs. This will normally be as a chargeable gain or allowable loss, though any loss can be treated as an income loss by election.

A transitional charge can also arise where the company ceases to be within the charge to Corporation Tax.

These rules are explained in more detail in CG54055+.

In order to ensure that over the life of a debt a broadly commercial measure of profit is brought into account, a further adjustment is made to reflect the difference between the market value taken into account for the deemed capital gain computation at 31 March 1996 and the value adopted for the start of the income rules at 1 April 1996 - normally the company’s book figure. The statutory provisions are at FA96/SCH15/PARA11. For more detail on this adjustment generally see the advice on loan relationships in the CT manual. For assets within the FOREX provisions see CG54055.