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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Loan relationships: tax avoidance: index-linked gilt-edged securities: introduction


Legislation - at CTA09/S400A to 400C - was introduced in Finance Act 2010 to deal with a particular form of tax avoidance involving index-linked gilt-edged securities.

For more detailed information on index-linked gilt-edged securities and their taxation please refer to CFM37120 to CFM37140. In brief, any movements in the carrying value of an index-linked gilt-edged security are exempted from tax to the extent that the movement relates to movements in the retail price index (RPI).

The avoidance scheme

The avoidance scheme that the anti-avoidance legislation was enacted to deal with involves a company creating a prima facie exposure to index-linked gilt-edged securities, and thereby triggering the exemption from tax, while simultaneously ensuring that the exposure is fully hedged in the market.

The hedge is commonly a derivative, such as a total return swap that effectively eliminates substantially all risk and reward in respect of a company holding an index-linked gilt-edged security. This means that while the company or group entering into the scheme remains economically flat, it manages to retain the tax advantage inherent in holding the index-linked gilt-edged security.

CFM39120 has an example of this scheme in practice.

These provisions are not intended to have any impact on the normal tax treatment for companies holding index-linked gilt-edged securities where those gilts are held as an investment with the consequent economic exposure.