CFM17546 - Repos: FA 2007 rules for companies: creditor repos – ignore acquisition and disposal for capital gains purposes

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

Creditor repos: ignore acquisition and disposal for capital gains purposes (Paragraph 11 Schedule 13 FA 2007)

For creditor repos, section 263A TCGA (see CFM17280) is replaced for CT purposes by Paragraph 11 Schedule 13 FA 2007. Paragraph 11 provides that acquisitions and disposals (purchases and subsequent sales) under creditor repos of securities that are chargeable assets will be disregarded for the purposes of that Act. This rule corresponds to the rule ignoring such disposals and acquisitions for debtor repos in paragraph 6 ( CFM17526).

Where a “lender” company (or a partnership of which the lender is a member) has a creditor repo and is under the arrangement the only person with the right or obligation subsequently to sell those or similar securities, the purchase and subsequent sale of the securities by the lender is to be ignored for TCGA purposes.

If at any time after the disposal, it becomes apparent that the lender will not subsequently sell those or similar securities, or if the “accounting condition” ceases to be met, the lender will be treated as making an acquisition 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 section 272 TCGA.

The “accounting condition” ceases to be met if the lender ceases to account for the advance as a financial asset otherwise than as a result of the subsequent sale of 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 acquired the securities as a result of the accounting condition ceasing to be met, a subsequent sale of the securities by the lender under the arrangement is also not disregarded for TCGA purposes.

The application of paragraph 11 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.