CFM17526 - Repos: FA 2007 rules for companies: debtor repos – capital gains tax

This guidance describes the corporation tax treatment of sale and repurchase arrangements (“repos”) where the initial sale of securities takes place on or after 1 October 2007

Debtor repos: ignore disposal and acquisition for capital gains purposes (Paragraph 6 Schedule 13 FA 2007)

For debtor repos, section 263A TCGA ( CFM17280) is replaced for CT purposes by paragraph 6 Schedule 13 FA 2007. Paragraph 6 provides that disposals and acquisitions (sales and subsequent purchases) under debtor repos of securities that are chargeable assets will be disregarded for the purposes of that Act.

Where a “borrower” company (or a partnership of which the borrower is a member) has a debtor repo and is under the arrangement the only person with the right or obligation subsequently to repurchase those or similar securities, the sale and subsequent purchase of the securities by the borrower is to be ignored for the purposes of CT on chargeable gains.

If at any time after the disposal, it becomes apparent that the borrower will not subsequently buy those or similar securities, or if the “accounting condition” ceases to be met, the borrower will be treated as making a disposal of the securities for TCGA purposes at that time, for consideration equal to the market value at that time. Under paragraph 14(1) Schedule 13 FA 2007 “market value” has the same meaning as in s272 TCGA.

The “accounting condition” ceases to be met if the borrower ceases to account for the advance as a financial liability otherwise than as a result of repurchasing the securities. For instance, the borrower and lender might modify the terms of the repo such that the securities will be sold back to the borrower for market value, so that the transaction then ceases to be accounted for as a loan.

Where the borrower is treated as having disposed of the securities as a result of the accounting condition ceasing to be met, a subsequent acquisition of the securities by the borrower under the arrangement is also not disregarded for TCGA purposes.

The application of paragraph 6 is modified in cases where, instead of the same or similar securities to those sold being returned at the end of the transaction, either

• Different securities are substituted during the term of the repo; or
• The securities are redeemed during the term of the repo and the borrower receives the redemption proceeds instead of the securities themselves.

See CFM17558.