CFM16780 - Taxing loan relationships: share-linked securities: taxing the issuer: chargeable gains treatment

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

Issuer of share-linked security: taxing the derivative

See CFM16605 to CFM16650 for an overview of the taxation of “hybrid” securities. CFM16780 to 16795 explain the detailed rules that apply to the issuer of an asset-linked security.

Accounting treatment

Where a company issuing an asset-linked security accounts separately for the derivative (the “contract for differences”), it must recognise any changes in its fair value at each balance sheet date. Accounting credits and debits may therefore arise in each period of account. See the example at CFM16630a.

Tax treatment

Where the issuer of an asset linked security accounts separately for the derivative, FA96/S94A provides for the derivative element to be taxed under the derivative contracts rules of FA02/SCH26.

Under the normal operation of FA02/SCH26/PARA15, debits and credits arising from a contract for differences are brought into account as income. However FA02/SCH26 applies to the issuer with the modifications at SCH26/PARA45K.

PARA45K(3) provides that where the security qualifies, the normal “income” treatment of debits and credits arising from the derivative is switched off. PARA45K(3A) then provides for the issuer to compute a one-off chargeable gain, or allowable loss, but only in the period in which the debtor relationship comes to an end.

The amount of the chargeable gain or allowable loss is found under PARA45K(3B) by treating the consideration for the disposal as equal to the amount of the proceeds of the issue of the security, and the cost as equal to the discharge amount, that is, the amount paid to discharge all the liabilities under the security.

In the unusual case where the paying company became party to the security after issue (for example, by novation) the consideration is equal to the amount of the carrying value of the host loan relationship contract at that time.

For periods ending before 30 December 2006 the comparison is between the amount paid to redeem the security and its full issue price (disregarding any issue costs). If the former exceeds the latter there is an allowable loss. In the reverse case there is a chargeable gain.

The conditions for chargeable gains treatment are at CFM16785.