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HMRC internal manual

Corporate Finance Manual

Old rules: asset-linked securities pre 2005: ceasing to qualify: tax effect

Effect of deemed disposal and acquisition

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

Loan relationship

After the disposal, all profits or losses were treated as debits and credits under the loan relationship rules, with a ‘starting value’ equal to the relevant consideration.

Chargeable gains

FA96/S93B(3) allowed the gain to be calculated and held over as if TCGA92/S116(10) applied. See the example at CFM82510. The effect of that was that a gain was calculated as though the security had been disposed of on the date it ceases to be within S92, but the gain was not charged until the security itself was disposed of, whether by redemption, conversion, or sale.

Chargeable gains under TCGA92/S116(10) are calculated by reference to the market value at the date of the hypothetical disposal. S93B(3)(c) provided that the market value for the purposes of s116(10) in this case was taken to be an amount equal to the relevant consideration (see CFM82490). Indexation was also given up to the date of the hypothetical disposal.

The combined effect of the legislation was to ensure that all profits, excluding interest, up to the date at which the asset falls out of s93 were taxed in full under the CG regime. By treating the consideration received as the starting point for loan relationships, there was then a clean hand-over into the loan relationships regime where all subsequent profits are taxed as income. Any chargeable gains computed are held over until there is a real disposal of the loan relationship.