Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Corporate Finance Manual

From
HM Revenue & Customs
Updated
, see all updates

Deemed loan relationships: shares with guaranteed returns: beginning or ceasing to be within the rules

Shares beginning or ceasing to be subject to S524 or S526

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

Shares are assets on the disposal of which chargeable gains or allowable loses may arise in accordance with the provisions of TCGA92. But when either CTA09/S524 or S526 applies to a share, that share is treated as a creditor loan relationship, so that profits and losses are taxed as income within loan relationships. There are specific provisions that deal with the transition when shares move into and out of the shares as debt rules. Those rules are provided by CTA09/S535 and by the original legislation which remains partly in FA96/S91G.

F(2)A05/SCH7/PARA9 modified the way in which the TCGA 1992 applies to shares that pass between two companies in the same group of companies where the shares are within the scope of FA96/S524 in the hands of one of the companies but not the other.

Basic rule: no change of ownership

Other than in a case where a share comes within the shares as debt regime at commencement (CFM45290) the basic rule is that where at any time on or after 16 March 2005 the conditions in CTA09/PT6/CH7 (formerly S91A or S91B) become satisfied in the case of any share, the investing company is deemed for the purposes of TCGA92 to have disposed of the share immediately before that time for a consideration equal to its fair value and to have immediately reacquired it for a consideration of the same amount. A chargeable gain or allowable loss, computed by reference to the fair value, may arise on that deemed disposal as it would on any other disposal.

And where at any time the conditions in CTA09/PT6/CH7 cease to be satisfied in the case of any share, the investing company is deemed for the purposes of both TCGA 1992 and loan relationships to have disposed of the share immediately before that time for a consideration equal to its fair value and to have immediately reacquired it for a consideration of the same amount. Any chargeable gain or allowable loss on a subsequent disposal of the share will be established by reference to the deemed reacquisition at fair value.

Example

A company acquired a share at cost 100 in 2005. In 2006, FA96/S91B begins to apply to the share at a time when fair value was 125. At the end of 2006, the share has a fair value of 135. In 2007, S91B ceases to apply to the share at a time when its fair value was 145. The company later sells the share for 160. The following consequences apply.

  • In 2006, there is a deemed disposal for the purposes of TCGA92 for 125. Subject to the provisions of TCGA92, there is a chargeable gain of 25 (125 - 100) less any indexation allowance due.
  • The share has a loan relationships cost of 125.
  • In the accounting period to 31 December 2006, the company will be taxed under loan relationships on the increase in value of 10 (135 - 125) under fair value accounting.
  • In 2007, when S91B ceases to apply, there is a deemed disposal for loan relationships purposes for 145, giving a profit on a related transaction of 10 (145 - 135) which is taxed as a credit arising from a related transaction. There is no chargeable gain on this disposal as the share represents a loan relationship and so counts as a qualifying corporate bond (TCGA92/S117 (A1)).
  • The company is treated as reacquiring the share for the purposes of TCGA92 at 145 in 2007, so when it finally disposed of the share for 160 there is, subject to the provisions of TCGA92, a chargeable gain of 15 (160 - 145) less any indexation allowance due.