CFM17090 - Stock loans: capital gains – default or redemption of securities

Capital gains – what happens when there is a default or redemption of securities

Default

If it becomes apparent that the borrower will fail to return the securities, the borrower is deemed for CG purposes to acquire them at that time and the lender to dispose of them. If the securities have by then been sold by the borrower they are, for the purpose of calculating the gain on that disposal, identified as the ones deemed to be acquired at this point.

Redemption of Securities during Loan

It is possible that the company that issued the securities borrowed under the stock loan arrangement might redeem them before that loan has terminated. In this case the lender may require the borrower not to return the shares but to pay it an amount equal to the proceeds of redemption. If this happens then the lender is deemed by TCGA92/S263C to have disposed of the securities for the redemption proceeds. If the borrower has held the shares to redemption then it is deemed not to dispose of them on redemption. If instead the borrower has previously sold the shares then for the purpose of computing the chargeable gain their cost is deemed to be the amount paid to the lender.