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HMRC internal manual

Corporate Finance Manual

Loan relationships: tax avoidance: reset bonds: change of ownership scheme

Change of ownership scheme

In this scheme, a group company subscribes for a single reset bond. Following a trigger event shortly after issue, its terms change, say, to increase the amount payable on maturity. So the market value of the bond suddenly rises.

The scheme typically involves an intra-group transfer of the bond, at its then market value, followed by a disposal of the acquiring company outside the group. No taxable profit arises on the intra-group sale, which is treated as taking place at cost under the group transfer rules in CTA09/PT5/CH4 (see CFM34000) The purchaser will have enough losses to cover the latent gain.

The wider arrangements set up by the scheme participants are likely to ensure that the original group has no tax exposure on sale of the subsidiary, and that the issuer’s net obligation on maturity of the bond is restored to the equivalent of par.