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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Old rules: asset-linked securities pre 2005: taxation treatment

Taxation treatment

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

Where FA96/S93 applied to a loan relationship

  • the company had to use an authorised accruals basis of accounting for that loan relationship
  • only interest was brought in as a credit or debit under the loan relationship rules
  • the chargeable gains rules applied to any other profits or losses arising on the asset representing the loan relationship.


Interest was taxed and relieved under the loan relationship rules. The purchase or sale price of the security might have included interest accrued but unpaid or not yet payable. S93(5) excluded such interest from the consideration given and received, as it was likely to have already been taxed on the holder as it accrued.

Chargeable gains

S93(4) ensured that TCGA 1992 applies to any profits or losses on the loan relationship as if the security were not a loan relationship.

Tax treatment: example

GR Ltd issued a bond for £800,000 on 1 July 1999, repayable 30 June 2004. The costs of issue were £5,000. The amount repayable was £800,000, varied by the percentage movement in the FTSE 100 index over the period. Interest of 3% was payable each year on 30 June. GR Ltd drew up its accounts to 31 December.

The purchaser, KW Ltd, incurred acquisition costs of £2,000. It drew up its accounts to 31 December. On 31 December 2001 it sold the bond to a third party, DF Ltd, for £830,000. Costs associated with the sale were £3,000.

The index rose by 10% over the period. On 30 June 2004 GR Ltd made a repayment of £880,000 to DF Ltd plus the final interest payment of £24,000.

GR Ltd

GR Ltd included the accrued interest as a debit in its accounts each year.

Following FRS4, the accounts would have also accrued the costs of issue. GR Ltd couldn’t have relief for the issue costs, so there should be an adjustment in the computations.

On repayment, GR Ltd got no relief for the indexed amount of £80,000 that it paid.

KW Ltd

KW Ltd would accrue interest as follows:

31/12/99 £12,000

31/12/00 £24,000

31/12/01 £24,000

The sale price of the bond would have reflected £12,000 interest accrued to 31 December 2001, as DF Ltd would receive the interest payment on 30 June 2002. That had to be excluded from the consideration.

KW’s chargeable gain computation would be:

Proceeds £818,000 less incidental costs on disposal £3,000 = £815,000

Cost £800,000 plus incidental costs of acquisition £2,000 = £802,000

Gain before indexation £13,000

DF Ltd

The CG acquisition cost for DF Ltd would also be £818,000.

DF Ltd would accrue interest to the date of redemption.

The chargeable gain on redemption would be £62,000 (£880,000 less £818,000) before costs and indexation.