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HMRC internal manual

Corporate Finance Manual

Other tax rules on corporate finance: securitisation: periods beginning on or after 1 January 2007: the regulations: the asset-holding company

The asset-holding company: regulation 6

The asset-holding company must meet two conditions:

  • its business, apart from incidental activities, must consist of acquiring, holding and managing the financial assets that form the whole or part of the security for the capital market arrangement (Condition A);
  • its liabilities representing debtor relationships (under the loan relationships legislation), are owed wholly or mainly, to a note-issuing company or an intermediate borrowing company (or companies) (Condition B).

Regulation 6 refers to an asset-holding company’s debtor relationships to a single note-issuer company or intermediate borrower, but the singular here may be taken as including the plural.

‘Financial assets’

As for the note-issuing company, the asset-holder must hold only financial assets. These are defined in Regulation 2 (CFM72350).

The most commonly encountered securitisations will involve financial assets such as receivables from mortgages and credit card debts. In such cases, the asset-holding company would normally be included in the regime, although in the most straightforward cases, there will be only one company that holds the financial assets and issues the notes, which will therefore also be within the definition of a ‘note issuing company’.

In a whole business securitisation where the business assets include non-financial assets which form the ultimate security for the capital market arrangement, those assets will normally be held by a company (or companies) within the originator group, with that company raising a secured loan from a note issuing company or an intermediate borrowing company. In such a case, the company holding the charged business assets is automatically kept out of the regime because it could only qualify (if at all) as an asset-holding company but would fail the test firstly for having assets which are not financial assets and secondly for having trading activity that could not be described as incidental to the CMA. Its business will not just be acquiring, holding and managing financial assets.

On the other hand, in such a case, the note-issuing company and any intermediate borrowing company will qualify as long as they satisfy the other conditions.

What does ‘holding financial assets’ mean?

In some cases assets transferred by the originator to the securitisation company may continue to be shown on the balance sheet of the originator, and the balance sheet of the securitisation company may show some asset or deemed asset other than the actual asset transferred. While the question of whether the assets are ‘financial assets’ will depend on applying the accounting definition, the securitisation company will be treated as ‘holding’ those assets which it beneficially owns as a matter of law.

A securitisation company may not always have direct and exclusive ownership of the assets which form the security for the capital market arrangement. Instead the assets may be held by a ‘receivables trustee’ and the securitisation company may hold an undivided beneficial interest in the receivables trust property. Holding such a beneficial interest will be treated as ‘holding’ the assets. The receivables trust property may include non-financial assets, incidental to the trust’s holding of the financial assets, and for the securitisation company this will be treated as an incidental activity to the holding of the financial assets.

CFM72420 deals with the case where the assets are held through a partnership.

CFM72430 deals with the case where the asset holding company issues subordinated debt.