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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: modifications to other tax rules: taxation of the investor

Taxation of the investor

The main cash flows in a securitisation are the receivables from the securitised assets and interest paid on the bonds issued to investors. It is common for some of that interest to be payable on limited recourse terms. That is, if the note-issuing company has insufficient funds, interest due on the securities automatically abates.

The Taxes Acts provide for interest to be re-characterised as a distribution in certain circumstances. CTA10/S1015 (4) ( re-characterises interest dependent on the business results, and CTA10/S1005 applies to interest paid at more than a reasonable commercial rate.

Regulation 16 provides that CTA10/S1015 to S1017 shall not apply to interest paid by a securitisation company. So all amounts paid out by the company, other than conventional dividends, will remain interest and be taxed as such in the recipient, and only conventional dividends will carry a tax credit.

Regulation 16 does not apply if the company has been excluded from the securitisation regime by virtue of failing the payments condition or unallowable purposes test (CFM72570). In such a case the company will still be a securitisation company for the purposes of the regulations, except for Regulation 14. It will be taxed on its accounting profit in the usual way and interest paid by it may be recharacterised as a distribution in accordance with CTA10/S1015 to S1017.