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HMRC internal manual

Corporate Finance Manual

Other tax rules on corporate debt: transfers of income streams: company transferors: transfer of underlying asset: transfer under sale and repurchase agreement

Company transferors: transfer of underlying asset: transfer under sale and repurchase agreement

CTA10/S752(3) ensures that where a transfer of an asset is made under an agreement that provides for its repurchase, then for the purposes of S752(1) the asset is to be treated as not having been transferred.

The legislation contains no definition of sale and repurchase agreement. HMRC considers that the expression covers not just agreements where there is a binding obligation to repurchase but to agreements that have the same practical effect (such as linked put and call options where it will always be a benefit for one party to exercise their option). It covers sale and repurchase of securities, but goes far wider.

Example 1

Town Ltd enters into a sale and repurchase agreement with Country Ltd under which an income generating asset is sold and repurchased. The income stream is retained by Country Ltd (and the consideration received by Town Ltd reflects that fact). Although the underlying asset is ‘transferred’, Town Ltd knows at all times that it will get it back and the effect of S752(3) is that the asset is treated as not having been transferred. So Town Ltd will be chargeable under S753 on the ‘relevant amount’ (see CFM77060).

Example 2

Urban Ltd sells securities to Rural plc under a sale and repurchase (or ‘repo’) agreement. Under the terms of the repo Rural will compensate Urban for not receiving the real income by the making of manufactured payments (CFM46010).

The manufactured payments represent consideration for the right to the income that Urban transfers as a result of the repo.

However, the income payments that are transferred are not relevant receipts. This is because relevant receipts are defined to be amounts that but for the transfer would be charged as income of the transferor. The transfer must therefore have the effect of causing the receipts not to be taxable income of the transferor. Where a sale is made under a standard repo this is not the case since the income is still treated as that of the seller - CTA09/S550. Accordingly, the transfers of income legislation will not apply.