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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Deemed loan relationships: shares with guaranteed returns: 16 March 2005 transitional rules

Where shares became subject to FA96/S91A or S91B on Budget day (16 March 2005)

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

The basic rule described in CFM45270 does not apply where a share was held by a company on 15 March 2005 and the shares became subject to FA96/S91A or S91B on Budget day (i.e. schemes existing on 16 March 2005). In such cases the transition of the share from an asset on the disposal of which chargeable gains or allowable losses could accrue that was held before the new legislation became effective into a loan relationship on the disposal of which no chargeable gain or allowable loss can accrue is dealt with as if the share became a qualifying corporate bond as a result of a transaction on 16 March 2005 within TCGA92/S116(1). The share immediately before 16 March 2005 is treated as the ‘old asset’, and the creditor loan relationship immediately after 16 March 2005 is treated as the ‘new asset’ for the purposes of TCGA92/S116.

The effect of this is that -

  • a chargeable gain or allowable loss is calculated as a result of the hypothetical disposal of the share on 16 March 2005 in accordance with TCGA92/S116(10)(a), and
  • that chargeable gain or allowable loss is deemed to accrue on a subsequent disposal of the share in accordance with TCGA92/S116(10(b) (see CG53845).


A company acquired a share at a cost for the purposes of TCGA92 of 100 in 2004. On 16 March 2005 the share falls to be treated as debt by virtue of FA96/S91B. Its ‘fair value’ then was 125, and this also happened to be the market value of the share for the purposes of TCGA92 at that time.

At the end of 2005, the share has a fair value of 135. In 2006 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:

There is a hypothetical disposal of the share by virtue of TCGA92/S116(10)(a) on 16 March 2005. Subject to the provisions of TCGA92, this results in a chargeable gain of 25 (125 - 100) less any indexation allowance due but the chargeable gain does not accrue at this time.

The share has a loan relationships cost of 125.

In the accounting period to 31 December 2005 the company will be taxed under loan relationships on the increase in value of 10 (135 - 125) under fair value accounting.

In 2006 when S91B ceases to apply there is a deemed disposal for loan relationships and TCGA92 purposes for 145, giving a loan relationships 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 itself as the share represents a loan relationship and so counts as a qualifying corporate bond (TCGA92/S117(A1)) and disposals of such bonds cannot produce chargeable gains (section 115(1) TCGA92). But the disposal causes the chargeable gain of 25 from the hypothetical disposal on 16 March 2005 to accrue (TCGA92/S116(10)(b)).

The company is treated as reacquiring the share for the purposes of the TCGA 1992 at 145 in 2006 so when it finally disposed of the share for 160 there is, subject to the provisions of the TCGA92, a chargeable gain of 15 (160 - 145) less any indexation allowance due.

Where the shares become ones to which sections 91A or 91B applies after 16 March 2005, section 91G(1) provides that the holder of the share is treated as disposing of it for its market value as at that date. There is no deferral of any chargeable gain that arises as a result of this deemed disposal.