CFM17210 - Repos: taxation: taxation issues

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

Taxation of repos

Look again at the example at CFM17170a.

The economic substance of the price difference of £1m between the sale and repurchase price is that of interest on a loan. But uncertainty about whether it could be characterised as interest under common law led to the position being formalised by ICTA88/S730A (which is re- written in ITA07/S607-S611). This provides that the difference between sale and repurchase price in a repo transaction will be treated as interest for both the original owner and the interim holder. The interest is treated as paid by the repurchaser on a deemed loan made by the interim holder. In the special collateral repo ( CFM17180) it is treated as interest on a loan from the repurchaser to the interim holder.

In the example at CFM17170a, section 730A (ITA07/S607-S611) ensures that the original owner is treated as paying, and the interim holder as receiving, interest of £1m.

The conditions for the legislation to apply are in section 730A (1) (now S607 (1) ITA07) see CFM17210a. It applies where the repurchase requirement is imposed by the same agreement as that under which the securities were sold or any related agreement. Agreements are related if they are entered into in pursuance of the same arrangement. The section also applies where the repurchase mechanism is an option.