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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Other tax rules on corporate finance: structured finance: capital gains tax

Structured finance arrangements TCGA consequences

The disposal of an asset under a structured finance arrangement might give rise to a chargeable gain or allowable loss. This would generally be the wrong result because the transfer of the asset is by way of security only so that the borrower will retain the risks and benefits of ownership.

So consistently with section 26 and sections 263A to 263D of TCGA 1992, dealing with mortgages, repos and stock-lending, section 263E (1) provides that the disposal of a security by the borrower or person connected with the borrower is disregarded for the purposes of TCGA. This disregard will apply if section 758 applies to a structured finance arrangement and there is a disposal of the security within the meaning of that section to the lender or person connected with the lender and condition A or B is met.

Condition A is set out in section 263E (2) and is that under the arrangement the person making the disposal and no-one else, has the right or obligation to reacquire exactly the same asset at any subsequent time.

Condition B is in section 263E (3) and is that the asset disposed of will subsequently cease to exist at any time, (because for example, it is a stream of income which expires once the ‘loan’ has been repaid with interest) and it is intended that the asset will be held by the lender etc from the time of the disposal until the time it subsequently ceases to exist.

Section 263E (4) provides that the initial disposal is disregarded for the purposes of TCGA subject to section 263E (4A). Section 263 (4A) brings the disposal back within TCGA as a disposal at market value, if at any time after the disposal it becomes apparent that the person making the disposal will not subsequently reacquire the asset under the arrangement, or will not hold the asset throughout the period from the disposal until the time the asset subsequently cease to exist.

Section 263E (5) provides that any subsequent reacquisition of the asset where the initial disposal was disregarded for the purposes of TCGA under section 263E (4), is also disregarded for the purposes of TCGA as long as it is made by the person who made the original disposal.

Section 263E (6) provides some definitions of terms used in it and gives them the same meaning as they have in section 758 onwards.

If the relevant disposal is on or after 6 June 2006, section 263 E has effect automatically. If the disposal was made before the date of announcement then the section applies if a claim is made to that effect. If no claim is made in such a case, then the subsequent reacquisition is not disregarded.

Section 263E (4A) was introduced by FA 2007 and amendments were also made to the wording and conditions of section 263E (2), (3) and (5). These FA 2007 changes have effect for disposals made on or after 6 March 2007, or any other disposals made before that date if a claim is made to that effect.

Care should be taken to distinguish and apply the wording and conditions of section 263E as it existed between 6 June 2006 and 5 March 2007 in appropriate cases.