CFM20100 - Securitisation: taxation: periods beginning before 1 January 2005: example

Basic tax treatment of asset backed securitisation: mortgage book example

The basic tax treatment of a securitisation of a mortgage book is quite straightforward.

The initial sale from the originator to an independent issuer SPV will constitute a Loan Relationship related transaction. The profits or losses arising on this transaction will be dealt with as loan relationship debits and credits, following FA96/S84 (see CFM5065 onwards).

The ongoing deferred consideration payments, or amortised discounts on the initial sale, constitute loan relationship debits for the SPV, and loan relationship credits for the originator as they accrue.

The servicing fees and other administration costs paid by the SPV to the originator (or indeed to any other third party) will be allowable as management expenses under ICTA88/S75, or as expenses falling under FA96/S84(3) (c) or (d).

The interest income arising from the underlying mortgage assets will be non-trade loan relationship credits in the hands of the SPV. The interest payments out to the third party investors will constitute non-trade loan relationship debits.

The small residual profit retained by the SPV (or passed onwards as a dividend to the charitable trust shareholder) will be taxable in the hands of the SPV.

In the case of an intra-group arrangement, the initial transfer to a group SPV, and the ongoing transfer of profits arising from that transfer (deferred consideration, amortisation of discounts etc) will be ignored for tax purposes, following the specific loan relationship legislation for intra-group transactions (FA96/SCH9/PARA12 – see CFM5800 onwards). This is because the legislation effectively disregards loan relationship related transactions between connected parties.

The servicing fees paid by the Group SPV to the originator will be allowable management expenses of the group SPV, and taxable income of the originator – and therefore tax neutral for the group as a whole.

The main cash flows of the securitisation – from the underlying mortgage assets to the SPV, and from the SPV to the investors – will be treated as non-trade loan relationship debits and credits, as they are for independent third party SPVs.