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HMRC internal manual

Corporate Finance Manual

Other tax rules on corporate finance: stock loans: capital gains: disposal, default and redemption

Capital gains: disposal, default and redemption

What happens when the borrower disposes of shares under a stock loan

The borrower under a stock loan may sell or lend shares it has borrowed and repay the loan with other shares. Where the borrower sells the shares (otherwise than under a repo - a sale and repurchase agreement - see CFM46100) and the transaction is not a trading transaction, a chargeable gain or allowable loss may arise. In calculating the gain or loss, the shares sold are deemed to be those with which the borrower repaid the loan. This ensures that their cost for capital gains purposes is the cost of the shares used to repay the loan. This rule is subject to the normal operation of the share identification rules in TCGA92/S104 - S108.


If it becomes apparent that the borrower will fail to return the securities, the borrower is deemed for CG purposes to acquire them at that time and the lender to dispose of them at market value. If the securities have by then been sold by the borrower they are, for the purpose of calculating the gain on that disposal, identified as the ones deemed to be acquired at this point. See TCGA92/S263B.

There is an exception to this rule (TCGA92/S263CA) where the default is due to the insolvency of the borrower and the lender uses collateral provided by the borrower to acquire identical securities to replace those previously lent. The treatment of this situation is the same as if the borrower had completed the stock loan by transferring the securities back to the lender (see CFM74140). Where the collateral provided is insufficient to replace all the securities lent, the lender is regarded as disposing of the unreplaced securities for nil consideration. If the lender subsequently receives any payment in recognition of its loss resulting from the shortfall in collateral, the amount or value of that payment is treated as a chargeable gain arising when it is received.

The exception applies where the borrower becomes insolvent on or after 24 November 2008. Lenders can also elect for it to apply from 1 September 2008, so as not to have chargeable gains and allowable losses on stock loans that went into default as a result of the insolvency of Lehman Brothers on 15 September 2008.

Redemption of securities during loan

It is possible that the company that issued the securities borrowed under the stock loan arrangement might redeem them before that loan has terminated. In this case the lender may require the borrower not to return the shares but to pay it an amount equal to the proceeds of redemption. If this happens then the lender is deemed by TCGA92/S263C to have disposed of the securities for the redemption proceeds. If the borrower has held the shares to redemption then it is deemed not to dispose of them on redemption. If instead the borrower has previously sold the shares then for the purpose of computing the chargeable gain their cost is deemed to be the amount paid to the lender.