CFM73220 - Other tax rules on corporate finance: structured finance: tax treatment of a complex case

Application of S764 to a complex case

If a case is one to which section 764 applies (whether as a Condition A or a Condition B case), then the tax treatment of the transaction is set out in section 765.

It is first necessary to determine (sections 765 and 768) if the structured finance arrangement would, as far as the borrower partnership is concerned, and apart from section 765, have the effect set out in 765 (3). If the effect is a specified one similar to those in section 759 (CFM73100) then for tax purposes the effect is reversed so the taxpayer is restored to the same position as if the arrangement had not been entered into.

In other words section 765 asks what the effect of the arrangements would be in the absence of section 765. If it would have had any of three specified effects, then it is not to have that effect. That is, the taxpayer will be restored to the position as if the arrangement had not been entered into.

The specified effect must apply in relation to a ‘relevant member of the borrower partnership’. ‘Relevant member of the borrower partnership’ is defined in section 765 (2) as being

  • in a Condition A case (section 763 (2)), the transferor partner
  • in a Condition B case (section 763 (3)), any member of the partnership immediately before the time at which a ‘relevant change’ occurs (but does not include the lender).

There are three specified effects.

The first, in section 765 (3) is that an amount of income which would otherwise have been charged to tax on a relevant member is not so charged. This would cover cases where the income is ‘pure income profit’.

The second, in section 768 (2), is that an amount which would otherwise been brought into account in calculating a relevant member’s income is not so brought into account.

This covers receipts which form part of the calculation of a profit whether of a trade, a property business or some other business.

The third, in TIOPA10/SCH5/PARAS3&4 is that a relevant member would have become entitled to an income deduction CFM73030.