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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Qualifying corporate bonds: loan relationships: asset-linked securities

This paragraph describes the capital gains aspects of the regime for asset-linked securities for companies for accounting periods ending on or after 26 July 2001. For periods ending before 26 July 2001, see CG54030.

FA96/S93 excludes from the loan relationships 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 land or an interest in land, or 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.

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.

FA96/S93A prevents the application of FA96/S93 to an asset-linked security if there are other arrangements in place to produce a guaranteed return. Such securities remain in the loan relationships regime (see CFM 5925).

For further advice on the detailed interpretation of FA96/S93, see CFM 5900+.

Because their value will to a substantial degree 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).

An asset-linked security may cease to be within FA96/S93. In that case, FA96/S93B provides that there shall be a deemed disposal of the security at that time, but the gain is held over under TCGA92/S116 (10) until the security itself is disposed of. There is an example at CFM5932a.