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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Deemed loan relationships: shares with guaranteed returns: outstanding third party obligations: repos and stock loans

Shares subject to repo, stock loans, etc

This guidance applies to companies that hold shares up to 21 April 2009

S524 applies where the investing company ‘holds a share’ in the issuing company. It would be possible for the company to retain the economic rewards of that ownership but not actually hold that share, and thus avoid being taxed on the interest-like return it is earning.

Accordingly, CTA09/S522(4) treats a company which does not ‘hold’ a share as continuing to do so in certain circumstances where the share has been transferred to another person. The circumstances are where the share has been transferred:

  • under a repo or stock lending arrangement (see CFM46000 and CFM74000), or
  • under a transaction which is treated by TCGA92/S26 (see CG78600 onwards) as not involving any disposal.

In each of these types of transaction, the transferor company effectively retains the economic benefit of ownership of the share.

Where S522(4) applies, the issuing company is treated as continuing to hold the share. If the other party to the transaction is also a UK company, that other company will actually hold the same share as a matter of fact, so that for tax purposes two companies hold the shares at the same time.

But this does not mean that both companies would be subject to a charge under S524. That is because normally the investing company would continue to benefit economically from the increase in value in the share, and under UK and international GAAP only that company would be required to account for that benefit. This is the same principle as applies to a standard UK market repo or stock lending transaction. If, exceptionally, the counterparty company is entitled to some or all of any value increase during the term of the transaction, then each company would be expected to account for its share and tax would follow that allocation.