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HMRC internal manual

Stamp Taxes on Shares Manual

HM Revenue & Customs
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Exemptions and reliefs: exemptions: loan capital exemption - exceptions

Sub-section (4) of FA86/S79 provides a wide exemption for transfers of loan capital (see STSM041050) unless they are caught by the provisions in sub-sections (5) or (6). Sub-section (5) provides that loan capital will not be exempt if it carries rights either to conversion into other securities or to acquire other securities (including loan capital of the same description). Sub-section (6) provides that loan capital is not exempt if it carries a right to an excessive rate of return or repayment.

Sub-section (6) is subject to exceptions at sub-sections (7)-(7B). Sub-sections 79(6)(a) and (c) provide that there is no exemption if the loan capital carries a right to an excessive rate of return or repayment. However, section 79(7) then provides that if the rate of interest or repayment is linked to the Retail Prices Index, over roughly the same period as the life of the loan capital, then subsections 79(6)(a) and (c) are disapplied i.e. the loan capital may still be exempt.

Section 79(6)(a) refers only to a reasonable commercial return at the time when the right to interest is created. Loan capital does not lose exemption because of subsequent changes in interest rates over which the issuer has no control. The same applies to an issue of a further tranche of an existing stock which comes within the scope of the exemption provided the further tranche will be on all fours with the original issue.

Section 79(6)(b) provides that where loan capital carries a right to interest linked to the results of, or of any part of, a business or to the value of any property the exemption does not apply. This restriction is disapplied (sub-section (7A)) if the return bears an inverse relationship to results.

Where the terms of a particular issue of loan capital link the amount of interest to be paid on it to a share index then the exemption does not apply. It is caught by the exception in section 79(6)(b) on the basis that the interest will depend “to any extent” on the results of a business.

Section 79(6)(c) provides that loan stock does not qualify for exemption if it carries a right on repayment to an amount exceeding the nominal amount of the capital and which is not reasonably comparable with the terms of issue of loan capital listed on the London Stock Exchange.