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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Deemed loan relationships: alternative finance: investment bond arrangements: tax treatment

Tax treatment of alternative finance investment bonds

Where sukuk meet the conditions in CTA09/S507 to be alternative finance investment bonds, additional payments made or received under the bonds are alternative finance return. This is subject to the provisions about discount - see CFM44180.

For corporation tax purposes, CTA09/S510(5) treats alternative finance investment bonds as loan relationships (see CFM44040).

For income tax purposes, ITA07/S564M applies to alternative finance return received or paid on such bonds. There are further statutory provisions for alternative finance investment bonds, which are relevant only to non-corporate holders. These are summarised at CFM44300.

Where an alternative finance investment bond is treated as a loan relationship, CTA09/S464 ensures that profits or losses from the bond cannot be taxed or relieved in any other way. But because many, if not most, sukuk arrangements

  • involve the creation of a trust, and
  • fall to be treated as collective investment schemes under Financial Services and Markets Act 2000,

the legislation provides that tax provisions relevant to trusts or to collective investment schemes do not apply.

Specifically, CTA09/S519(4) ensures that alternative finance investment bonds are not treated as a unit trust scheme either for the purposes of CTA09/PT10/CH5 or ITA07/S1007 (dealing with the taxation of unauthorised unit trusts) or for capital gains purposes; not treated as an offshore fund; and, for a company, are not a ‘relevant holding’ in a unit trust or offshore fund for loan relationships purposes.

CFM44240 explains the tax treatment of ‘bond assets’ held by a company issuing alternative finance investment bond.