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HMRC internal manual

Corporate Finance Manual

Deemed loan relationships: alternative finance: investment bond arrangements: conditions

Statutory conditions for alternative finance investment bonds

Sukuk arrangements are capable of taking a wide variety of forms. Those which fall within the alternative finance legislation are those which function economically as debt securities.

CTA09/S507(1) lays down a number of conditions that alternative finance investment bonds must satisfy, and S507(2) provides further details of the conditions.

  • The arrangements provide for one person, described in the legislation as the bond-holder, to pay a sum of money (‘the capital’) to another person, described as the bond-issuer.
  • The arrangements must identify assets, or a class of assets(‘the bond assets’ - CFM44150). In many cases, this ‘identification’ will take the form of the issuer making a Declaration of Trust in respect of the assets. But the arrangements may still come within the rules if the sukuk holders’ interest in the assets may take some different legal form.
  • The bond-issuer must acquire the bond assets in order to generate income or gains. The requirement for the issuer to acquire assets means that arrangements under which an issuing company pledges existing assets as collateral for borrowing, or where a charge is created over particular assets of the issuer, do not come within the legislation.
  • The arrangements must have a fixed term or maturity date. This distinguishes alternative finance investment bonds from, for example, collective investment schemes, where the investor’s interest in the scheme may subsist indefinitely. But arrangements are not disqualified because investors (usually by majority vote in a general meeting) may have the right to require the trust to be dissolved early in certain circumstances.
  • Under the arrangements, the bond-holders must be entitled to two sorts of payment. At the end of the bond term, the bond-issuer must dispose of the remaining bond assets, and make a payment to the bond-holder - described as the redemption payment - to repay the capital subscribed. The bond-holder must also receive additional payments, either during the term of the bond or at maturity, or both - see CFM44160.
  • The amount of the additional payments must not exceed a reasonable commercial return (CFM44200) and the arrangements must be wholly or partly treated in accordance with international accounting standards as a financial liability (CFM44210).
  • The arrangements must allow the bond-issuer to manage the assets (CFM44150), so as to generate sufficient income to make the redemption payment and the additional payments.
  • The alternative finance bonds must be listed on a recognised stock exchange (CFM44220). They must also be transferable - although listed securities will always fulfil this condition.