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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Deemed loan relationships: alternative finance: investment bond arrangements: tax treatment of ‘bond assets’ as securities

Income tax and capital gains tax consequences

CTA09/S518 provides that alternative finance investment bonds are securities for corporation tax purposes (CFM44120 explains the scope of this phrase).

This means that, if alternative finance investment bonds are transferred by or to an individual or a trust, the accrued income scheme will apply (SAIM4000). The rules on deeply discounted securities (SAIM3000) will be applicable if the bonds are issued at a discount or redeemed at a premium. Application of the terminology in these provisions is largely a matter of common sense: but S518 explicitly states that references to redemption should be taken as referring to the making of the redemption payment, and references to interest as being to alternative finance return.

Furthermore, the capital gains tax rules relevant to a disposal of securities (see CG53400 onwards) will apply to disposal of an alternative finance investment bond. Gains arising on disposal of conventional securities are not chargeable gains if the security is a qualifying corporate bond (QCB). A security will not be a QCB if it is denominated in a non-sterling currency, if it is convertible into or exchangeable for shares, or if the return on the security is dependent on business results.

Similar provision is made for alternative finance investment bonds by TCGA92/S151T. The bond will be a QCB if, but only if

  • the capital is expressed in sterling, and there are no arrangements under which the redemption payment might be made in a non-sterling currency;
  • the instrument is not convertible into, or exchangeable for, shares or securities apart from further alternative finance investment bonds; and
  • the additional payments are not determined by reference to income from, or the value of, the bond assets.

This last condition should not be interpreted as meaning that a bond is not a QCB purely because the ‘headline’ rate of return will not be payable if there is a shortfall in income from the bond assets. It is intended to exclude arrangements where the investor participates in both reward and risk from the underlying assets from being QCBs - although such arrangements are likely to fail the ‘reasonable commercial return’ test (CFM44200) and will thus not, in any case, come within CTA09/S507.

Commencement

The statutory provisions relating to alternative finance investment bonds in general apply for income and capital gains tax purposes from 6 April 2007. However, in relation to disposals of alternative finance investment bonds after 6 April 2007, ITA07/S564G and TCGA92/S151T by virtue of TIOPA10/SCH9/PT10/S37(4) are deemed always to have had effect.

Thus suppose, for example, Mrs A disposes on 1 December 2008 of sukuk that she has held since they were issued on 1 June 2006. For all capital gains tax purposes (including taper relief), it is treated as a disposal of securities that were acquired on 1 June 2006. If, under TCGA92/S151T, they are treated as QCBs, they will be regarded as having always been QCBs and a gain on disposal will be wholly exempt.