CG53400 | Shares and securities: debts: what is a debt?

A debt exists whenever money is owed to someone else.

Secured debts

The debt may be described as 'secured' on an asset, or assets, of the borrower. This simply means that, if the borrower fails to pay, the lender has rights over the asset, or assets, put up as security for the debt. Mortgages on private houses, for example, are usually secured on the house itself. It does not matter, for capital gains purposes, whether a debt is a secured debt, or not. You should note, however, that a secured debt is not the same as 'the debt on a security'.

Documentation

There does not need to be any written evidence of a debt, but often the borrower (debtor) will give some form of written acknowledgement of the debt to the lender (creditor). These may vary from simple IOUs, to detailed documents covering points such as the terms of repayment, and rates of interest payable on the amounts owing. You may see these documents described variously as Bills of Exchange; promissory notes; debentures; loan notes; loan stock; or corporate bonds. Although these names may give some indication of the types of debt, they are not, in themselves, important in determining the Capital Gains Tax treatment of the debts.

FA93 and FA96

The advice in this section will help you to decide the appropriate tax treatment of debts within the capital gains regime. You should note, however, that the tax treatment of debts has been significantly altered over time.

For companies, FA1993 introduced a new regime for the taxation of foreign exchange gains and losses (FOREX). As a result of this, much of the debt held by companies was removed from the scope of chargeable gains, see CG53470 and CG53776+. General advice on the chargeable gains aspects of the FOREX regime is at CG44000.

More general changes to the tax treatment of debts were introduced by FA96. These changes affect both individuals and companies, as follows.

• For Corporation Tax purposes, the new regime applies to disposals on or after 1 April 1996. The majority of debts held by companies will not be within the capital gains charge at all. You are advised to read CG54000+ before considering the possible Capital Gains treatment of the debt.

• For Income Tax purposes, the new regime applies to disposals on or after 6 April 1996. It applies to discounted debts only. For many debts held by individuals, the present chargeable gains rules will continue, and the general advice in this section will continue to apply. Advice on the new rules for discounted debt held by individuals is at CG54200+