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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: ‘asset-backed’ securitisation arrangements

Issue of alternative finance investment bonds by vehicle companies

An issue of alternative finance investment bonds is likely to resemble a securitisation. It is conventional for a separate vehicle company to be set up to issue sukuk, although it would equally be possible for the company needing the finance to issue the sukuk itself.

CTA09/S519 prevents a bond issuer from being treated as a securitisation company with FA05/S83, unless it comes within FA05/S83 for reasons unconnected with the alternative finance investment bond issue. This means that bond issuers are not dragged into the temporary regime for securitisation companies, which was intended only for securitisation companies in existence at 31 December 2004.

Instead, CTA09/S518(1)(c) makes it clear that a bond issuer is the debtor to a capital market arrangement for the purposes of CTA10/PT13/CH4. This removes an obstacle to alternative finance bond issuers coming into the permanent regime for securitisation companies. The issuing company must, of course, meet the remaining conditions for entry into the regime. It will depend on the facts of a particular case whether or not it does so. CFM72000 has more on the special rules for securitisation companies.

Issuing companies that are part of a group

Where a company (the originator) seeking to raise finance issues sukuk through a vehicle company, that issuing company may or may not be part of the originator’s group.

CTA09/S519 contains provisions to ensure that, where the bond issuer is part of a group for UK tax purposes, the group relationship is not broken just because of the bond issue.

CTA10/S454(1)(e) makes any person who can secure the income or assets of a company are applied to his benefit a participator in that company. This could lead to any holder of alternative finance investment bonds being treated as a ‘quasi shareholder’ in the bond issuer. The alternative finance legislation disapplies S454(1)(e), and provides that holding alternative finance investment bonds makes a person a loan creditor, and only a loan creditor, of the company.

The holder will therefore also be a loan creditor for the purposes of CTA10/PT5/CH6 (see CTM81000 onwards). This means that the holder could be classified as an equity holder under CTA10/S158 if the alternative finance investment bond is not a normal commercial loan. Thus the issuing company might cease to be a 75% subsidiary, or a 90% subsidiary, of its parent company, with implications for group relief and chargeable gains.

In considering the definition of normal commercial loan at CTA10/S162(4)(a) - which disqualifies any loan where the interest is dependent on the results of the company’s business - is disapplied. As a result, the bond is not disqualified from being a normal commercial loan just because the holder has recourse only to the bond assets (see CTM81020 for the treatment of limited recourse loans in general).

An alternative finance investment bond may not be a normal commercial loan for other reasons, for example if it is convertible into shares or securities. If this is the case, the same tax consequences follow as for a conventional security that is not a normal commercial loan.