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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Qualifying corporate bonds: FA96: loan relationships: CG consequences

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+

Apart from the exceptions mentioned below, loan relationships are treated as QCBs for the purposes of Corporation Tax, see CG54010. So - apart from any transitional charge or allowance, see CG54050+ - there will be no continuing consequences to these debts for capital gains purposes.

Assets representing loan relationships which are convertible into shares, or are linked to the value of chargeable assets, are not treated as QCBs. These assets remain within the capital gains regime and chargeable gains, or allowable losses, can continue to arise on disposals of these debts, see CG54025+ and CG54030+.

An asset representing a loan relationship dealt with wholly within the income regime may be converted into another debt which is not. The new debt will not be a QCB, so it will be necessary to establish the base cost of the new debt for capital gains purposes.

Where a conversion of securities falls within TCGA92/S132, the no disposal/single asset fictions of TCGA92/S127 apply. However, where - as here - the old asset is a QCB, this treatment is prevented by TCGA92/S116. Instead, the new debt is treated as having been acquired, at the date of the conversion, for a consideration equal to the market value of the old asset (the QCB) immediately before the conversion, TCGA92/S116 (6).

TCGA92/S116 (4A) ensures that all loan relationships are treated as securities for this purpose.

TCGA92/S116 (8A) ensures that the exchange or conversion is treated as a disposal of the original loan relationship, at the same date, and at the same market value, for the purposes of the income regime. The consequences of this will depend on whether the parties to the loan relationship are connected, within the terms of FA96/S87. For further detail on this, see the CT manual.