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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Qualifying corporate bonds: FA2002: loan relationships

This guidance describes the capital gains aspects of the regime for Loan Relationships of companies as amended in FA2002. In general these provisions apply for accounting periods beginning on or after 1 October 2002, although some aspects have commencement dates of 26 July 2001 or 19 December 2001 (convertible securities, FA96/S92 and asset-linked securities, FA96/S93 - see CG54120-54130). For periods beginning before these commencement dates see CG54000+ for loan relationships, and CG44000 for foreign exchange (FOREX), which FA2002 brought into the Loan Relationships regime and for Financial Instruments. Advice on the rules which apply to debts held by individuals, and other non-corporates such as trustees, is at CG54200+.

FA2002 amended the FA96 rules for corporate loan relationships for accounting periods beginning on or after 1 October 2002. The CG aspects of the previous corporate loan relationship regime, introduced by FA96 with effect from 1 April 1996, is covered at CG54000+. FA2002 did not change the basic outline of the loan relationship legislation, but brought FOREX within the corporate loan relationship regime and the new derivative contracts regime which replaced Financial Instruments.

The effect of the FA96 rules 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 loan relationship rules specify the accountancy treatment to be used for tax purposes to determine the credits and debits to be brought into the company’s tax computation on its loan relationships, where they represent assets or liabilities. In the case of an asset, where the loan relationship is held as an integral part of a trade (such as banking or insurance), the debits and credits go into the company’s Case I computation. Where the loan relationship is not held as an integral part of the trade, the debits and credits are aggregated with the debits and credits on liabilities not entered into for the purposes of a trade, and if the result is positive, there is a charge under Case III of Schedule D. There is a separate definition of Case III for companies and there are specific relief provisions where the result of the aggregation is negative. There could be net debits on assets, for example, where a company made a loss on selling securities which are held as investments.

Detailed guidance on the FA2002 regime for loan relationships is in the Corporate Finance Manual (CFM).