CFM17205 - Repos: taxation: introduction

This guidance describes the treatment of repos for income tax and capital gains tax purposes, and for corporation tax purposes where the original owner transfers the securities to the interim holder before 1 October 2007

Introduction to the operation of the repos legislation

As with stock lending there are a number of tax problems to which repos give rise, but the rules are more complex than those for stock lending. The issues are:

• the price differential on a repo is economically equivalent to interest. However, because of doubt as to whether it is interest in legal terms, it is deemed to be interest by ICTA88/S730A and ITA07/S607 ( CFM17210);
• the net paying repo is economically equivalent to the standard repo and should therefore be taxed in the same way. But because Section 730A and ITA07/S607-S611 work on cash flows and the cash flows under a net paying repo are different, this requires additional deeming rules in ICTA88/S737A and S737C and Chapter 4 of Part 11 of ITA07 ( CFM17235);
• the temporary transfers of securities representing loan relationships would, in the absence of specific provisions, be related transactions ( CFM5065) under the loan relationship rules - CFM17265;
• the temporary transfers of equities between lender and borrower would, in the absence of overriding legislation, constitute disposals for capital gains - CFM17280.