CFM16805 - Taxing loan relationships: share-linked securities: transitional rules: holders

This guidance applies for periods of account beginning on or after 1 January 2005

Continuity of tax treatment: assets

For holders of an asset-linked security, under the former rules in FA96/S93 the only amounts brought in under the loan relationships rules were interest receivable, and exchange gains and losses, in respect of the security. All other gains and losses were taxed under the normal chargeable gains rules.

Broadly, the previous tax treatment is continued for a share-linked security held by a company both before and after the start of its first period of account to begin on or after 1 January 2005. This is achieved by two separate provisions – one relating to the embedded derivative, and one to the host contract.

The embedded derivative

Where FA02/SCH26/PARA45F applies to a security which was issued before the first accounting period beginning on or after 1 January 2005 (“existing assets”), FA02/SCH26/PARA45FA provides that no amounts are to be brought in under the derivative contracts rules. The security is not treated as a qualifying corporate bond and hence is not treated as exempt from chargeable gains. A just and reasonable apportionment is to be made in respect of interest received or accruing under the security (but not exchange gains or losses), to exclude such amounts from consideration received on disposal for chargeable gains purposes. Broadly, therefore, the previous tax treatment is continued for the holder of an asset-linked security existing at 1 January 2005.

The host contract

For loan relationships purposes, regulation 11 of the Disregard Regulations (SI 2004/3256 – see CFM13270) applies to any asset-linked security that was within FA96/S93 immediately before the start of the company’s first accounting period beginning on or after 1 January 2005. It does not matter whether or not the company subsequently accounts separately for the host contract and the embedded derivative. The only loan relationships credits (or debits) brought into account are those relating to interest; where the company uses an effective interest method, this is ignored when ascertaining the interest credits. As under FA96/S93, any exchange differences, and any impairment of the security, are swept up into the final capital gains computation.

Any transitional adjustment when a company adopts IAS 39 or FRS 26 for the first time is disregarded.