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HMRC internal manual

Corporate Finance Manual

Loan relationships: special types of security: funding bonds: issue

Funding bonds issued to cover an interest liability

A company may issue funding bonds to a creditor instead of making a payment of interest. This section describes how the issue of funding bonds is treated for tax purposes.

Where funding bonds including any

  • bonds,
  • stocks,
  • shares,
  • securities or
  • certificates of indebtedness

are issued to a creditor in respect of any liability to pay interest on any debt incurred by any

  • government,
  • public authority,
  • public institution or
  • body corporate

CTA09/S413 treats the issue as if it were a payment of interest for corporation tax purposes. ITTOIA05/S380 achieves the same effect for income tax purposes. However the amount treated as paid cannot exceed the value of the bonds at the time of their issue. ‘Value’ here means market value - CFM37440.

It is the issue of the bond itself which counts as the ‘payment’ of interest, and not its later redemption for cash (CTA09/S414).