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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Old rules: asset linked securities pre 2005: overview

Loan relationship linked to chargeable assets

This guidance applies to periods of account beginning before 1 January 2005 

A company may lend in such a way that the return on the loan is linked to the value of a chargeable asset. For example, the amount to be repaid could depend on the movement in the value of shares in a particular company over the life of the loan.

Where the return is fully linked to the changes in the value of an asset, the lender’s position is the same as if it owned the asset. The lender risks a loss if the asset falls in value, but will benefit from any increase. FA96/S93 recognised the ‘capital type’ risk of such loan relationships and, in certain circumstances, excluded profits or losses arising on them. The chargeable gains rules then applied to such profits and losses, although the loan relationships legislation applied to any interest payable or receivable.

When the asset increased in value this capital treatment benefited the creditor, as any gain was taxed when it was realised, and could be reduced by indexation allowance.

Correspondingly, capital treatment was less beneficial for the debtor, as there would be no relief for costs other than interest payable.

S93A excluded loan relationships linked to the value, or indices of the value, of specific capital assets where the return was guaranteed as a result of a link with one or more derivative contracts. Such loan relationships were not given chargeable gains treatment but fell wholly within the normal rules.

S93B dealt with asset-linked loan relationships that

  • ceased to qualify for the S93 treatment, but
  • were still held by the same company.

These rules calculated any chargeable gain arising up to the point that the loan relationship ceased to come within S93, but held over the gain or loss until the security was disposed of.