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HMRC internal manual

Corporate Finance Manual

From
HM Revenue & Customs
Updated
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Deemed loan relationships: repos: special collateral repos and reverse repos

Particular types of repo

Special collateral repos

A special collateral repo is an alternative to, and may be economically equivalent to, a stock loan collateralised by cash (CFM46010). It is driven by the desire of a person to acquire particular securities for a limited period of time. In a special repo, the repo rate will be below the prevailing rate for general collateral repos. Indeed it may occasionally be negative so that the borrower of cash (the original owner of the securities) is actually being paid the equivalent of interest by the lender (interim holder). In special collateral repos, the repo functions like a stock loan. They may therefore form a useful source of income for holders of the relevant securities, such as life assurance companies, pension funds, banks and other financial institutions if they can invest the cash at a higher rate than the repo rate.

A transaction where the purchaser pays the equivalent of interest used to be treated as a repo for both income tax and corporation tax purposes. Such a transaction remains a repo for income tax purposes (ITA07/S607(4)) but is not a repo for corporation tax purposes if entered into on or after 1 October 2007 (see CFM46520).

Reverse repos

In market terminology, a ‘repo’ always means a transaction from the point of view of the borrower. A transaction from the point of view of the lender is known as a ‘reverse repo’.

For corporation tax purposes, repos from the point of view of the borrower are known as ‘debtor repos’ for simple transactions and ‘debtor quasi-repos’ for more complex transactions; repos from the point of view of the lender are known as ‘creditor repos’ for simple transactions and ‘creditor quasi-repos’ for more complex transactions. The income tax rules do not distinguish between the position of the lender and that of the borrower.