CFM17240 - Repos: taxation: net paying repos - example

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

An example of a net paying repos

Consider again the example at CFM17190a:

Original owner sells gilts for £100m
Under a standard repo it would repurchase in 3 months for £101m

But during the repo period an interest payment of £2m will be made.

Rather than repurchase price being £101m the parties agree that the interim holder will not be required to make any manufactured payment in respect of interest receipt but will repurchase instead for £99m. The tax consequences are set out below.

Original owner

The original owner is deemed to have received manufactured payments equivalent to the real interest/dividend of £2m. This is taxed in same way as if it had received a real manufactured payment:

• as an interest receipt under the loan relationship rules if the underlying securities are debt instruments ( CFM17345 and CFM17420),
• as a UK dividend if the securities are UK shares CFM17340,
• under Case V (or S402 ITTOIA 2005) if payable in respect of overseas equities CFM17410.

This deemed payment is then added to the actual repurchase price for the purpose of determining the Section 730A or ITA07/S607 price differential. So in the example above the original owner is deemed to repurchase for £101m. This should give the original owner a loan relationship debit of £1m deductible on an amortised cost basis (or authorised accruals basis for pre-2005 starting accounting periods).

Interim Holder

The interim holder receives real interest/dividends and is deemed to make equivalent manufactured payments. These amounts should cancel out leaving no tax effect.

The repurchase price is then treated as increased by the amount of the deemed payment for the purpose of determining the section 730A or ITA07/S607 price differential. In the example above it is treated as buying for £100m and selling for £101m. This should produce a loan relationship credit of £1m taxable on an amortised cost basis.