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HMRC internal manual

Corporate Finance Manual

Old rules: asset-linked securities pre 2005: guaranteed returns

Introduction to S93A

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

Securities that fell within FA96/S93A did not get the advantageous tax treatment of S93 (profits, excluding interest, taxed under TCGA 1992).

A security fell under S93A if there was an arrangement so that the return from

  • the loan relationship, and
  • any associated transactions involving futures and options

produced a guaranteed return.

A guaranteed return reduces the risk of changes in the value of the underlying asset. The combined returns on the various instruments (the security and the derivative contracts) effectively give an interest-like return. In those circumstances it would not have been appropriate to give chargeable gains treatment to the transaction. S93A ensured that loan relationships that were part of such an arrangement got income treatment.

FA02/SCH26/PARA5 ensured that transactions in futures and options,

  • whose underlying subject matter was shares or similar types of asset, and
  • which were normally taxed under the chargeable gains rules (unless they were profits of a trade),

were taxed as income where they produced a guaranteed return.

This was because such arrangements meant that any fluctuations in the value of the assets were minimised, and the return was more like interest than capital.

Securities did not come within S93A only because the investor’s losses were limited by a ‘floor’.

Conditions for S93A to apply

FA96/S93A only applied to creditor relationships within s93, that is, asset- or index-linked securities held as investments. It applied where

  • the loan relationship was associated with other transactions (one or more) designed to produce a guaranteed return,
  • the ‘other transactions’ were derivative contracts as defined by FA02/SCH26/PARA6, and
  • the guaranteed return was made up of the amount needed to repay the loan relationship, plus the return from the disposal of any one or more of the derivative contracts.