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HMRC internal manual

Corporate Finance Manual

Loan relationships: computational rules: GAAP: changes of accounting policy: ‘tainted’ HTM assets

‘Tainted’ held to maturity assets

CFM21570 explains that if a company sells or reclassifies more than an insignificant proportion of its held to maturity assets, it must reclassify all of its remaining held to maturity assets as available for sale and so use fair value accounting. This ‘tainting’ lasts for the remainder of the accounting period and for the next two years. After that, any such assets that the company still holds can once again be classified as held to maturity.

Regulation 5 of the Loan Relationships and Derivative Contracts (Change of Accounting Practice) Regulations 2004 (SI 2004/3271) allows a company to ignore the ‘tainting’ for tax purposes, and to continue computing loan relationships credits and debits on an amortised cost basis.

The regulation applies where in an accounting period

  • a company disposes of less than 10% of its held to maturity assets, measured on an amortised cost basis (the reference to ‘greater than 10%’ in the original version of the regulations was an error); and
  • as a result, the remaining held to maturity assets are reclassified as available for sale.

The effect of the regulation is to disregard for tax purposes both fair value changes in the assets that are taken to equity during the period that they are classified as available for sale, and accounting adjustments when the assets are reclassified from held to maturity to available for sale, or back again. But the company can elect, within 90 days of making the disposal, that the regulation will not apply, in which case CTA09/S308 will apply in the normal way.

The application of this regulation is likely to be uncommon in practice, since only a minority of companies are likely to hold loan relationships that meet the stringent conditions for held to maturity classification.