beta This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

Corporate Finance Manual

Loan relationships: tax avoidance: index-linked gilt-edged securities: example


A company holds index-linked gilt-edged securities and receives a total return from those gilts of £500m.

£400m of that return relates to the element that derives from movements in the RPI (i.e. the increase in carrying value relating to RPI).

The company has entered into a total return swap such that it pays away the return that it receives from holding the index-linked gilt-edged security (perhaps receiving a LIBOR-based return instead).

Economic Position

As the company will be paying away the return of £500m it will remain economically flat.

Tax Position

£400m of the return from the index-linked gilt-edged securities related to changes in carrying value due to movements in the RPI and so therefore only £100m of the total return of £500m will be taxable.

Against this, the full amount of £500m paid away under the total-return swap will be tax deductible.

The final position is:

Taxable Credits £100m

Taxable Debits £500m

So, a net tax loss of £400m is created from nothing more than a combination of essentially circular transactions. The end result is a significant tax advantage and no economic exposure.