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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Deemed loan relationships: repos: tax rules: creditor and debtor repos: capital gains consequences

Creditor and debtor repos: ignore acquisition and disposal for capital gains purposes

FA07/SCH13/PARA11 and PARA 6 provides that acquisitions and disposals (purchases and subsequent sales) under creditor and debtor repos respectively of securities that are chargeable assets will be disregarded for the purposes of TCGA. These rules were not rewritten in CTA09 and remain in FA07/SCH13.

Creditor repos

PARA11 provides that where a ‘lender’ company (or a partnership of which the lender is a member) has a creditor repo and is under the arrangement the only person with the right or obligation subsequently to sell those or similar securities, the purchase and subsequent sale of the securities by the lender is to be ignored for the purposes of chargeable gains on companies.

If at any time after the disposal, it becomes apparent that the lender will not subsequently sell those or similar securities, or if the ‘accounting condition’ ceases to be met, the lender will be treated as making an acquisition of the securities for TCGA purposes at that time, for consideration equal to the market value at that time.

Debtor repos

PARA6 provides that where a ‘borrower’ company (or a partnership of which the borrower is a member) has a debtor repo and is under the arrangement the only person with the right or obligation subsequently to repurchase those or similar securities, the sale and subsequent purchase of the securities by the borrower is to be ignored for the purposes of CT on chargeable gains.

If at any time after the disposal, it becomes apparent that the borrower will not subsequently buy those or similar securities, or if the ‘accounting condition’ ceases to be met, the borrower will be treated as making a disposal of the securities for TCGA purposes at that time, for consideration equal to the market value at that time.

The following apply in both cases.

  • ‘Market value’ has the same meaning as in TCGA92/S272 (see FA07/SCH13/PARA14).
  • The rule is modified in cases where, instead of the same or similar securities to those sold being returned at the end of the transaction, either different securities are substituted during the term of the repo, or the securities are redeemed during the term of the repo and the borrower receives the redemption proceeds instead of the securities themselves.
  • The ‘accounting condition’ ceases to be met if the lender ceases to account for the advance as a financial asset, or the borrower ceases to account for it as a financial liability otherwise than as a result of a subsequent sale or repurchase of the securities (for instance, the borrower and lender might modify the terms of the repo such that the securities will be sold back to the borrower for market value, so that the transaction then ceases to be accounted for as a loan).

Where the borrower is treated as having acquired or disposed of the securities as a result of the accounting condition ceasing to be met, a subsequent sale of the securities by the lender or acquisition by the borrower under the arrangement is also not disregarded for TCGA purposes.