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HMRC internal manual

Corporate Finance Manual

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


In order for the anti-avoidance provisions at CTA09/S400A to apply, three separate conditions must be met:

Condition 1

Condition 1 at CTA09/S400A(2) is that a company is party to a ‘relevant hedging scheme’ at any time in an accounting period.

A ‘relevant hedging scheme’ is defined at subsection (6) as being ‘a scheme the purpose, or one of the main purposes, of any party to which, on entering into the scheme, is to secure that the index-linked capital return on the security, or a proportion of it, is hedged’. CFM39150 has further details.

Condition 2

Condition 2 at CTA09/S400A(3) is that there is an increase in the RPI between the times mentioned in subsection (1) of section 400 (i.e. between the start of the relevant accounting period (or if later the date of acquisition of the gilts) and the end of the accounting period (or if earlier the date of disposal of the gilts)).

This means that, in effect, the rules will only apply where the normal rules would act to take taxable credits out of account. Consequently, these rules will not apply to prevent deductions from being taken out of account for tax in the more unusual circumstance of the RPI decreasing between any two times.

Condition 3

Condition 3 at CTA09/S400A(4) is that the ‘index-linked capital return’ on the index-linked gilt-edged security, or a proportion of it, is ‘hedged’.

The ‘index-linked capital return’ is defined at subsection (7) as being that proportion of the increase in the carrying value of an index-linked gilt-edged security that is attributable to increases in the RPI. This is, therefore, referring to the return from holding the index-linked gilt that arises from increases in the RPI-linked final redemption amount.

The return on a security (or any proportion of that return) is defined as ‘hedged’ at subsection (8) where the ‘pre-tax economic profit or loss’ made by the ‘relevant group or company’, is not affected by the index-linked capital return from the index-linked gilt-edged security. This may be through the operation of a swap or otherwise.

CFM39160 has further detail on what is meant by the ‘pre-tax economic profit or loss’.

CFM39170 has further detail on what is meant by the ‘relevant group or company’.