CFM46490 | Deemed loan relationships: repos: tax rules: regulations: substitution or redemption of securities

From HM Revenue & Customs · Corporate Finance Manual

Repos involving substitution or redemption of securities

For debtor and creditor repos, The Sale and Repurchase of Securities (Modification of Schedule 13 to the Finance Act 2007) Regulations 2007 (SI 2007/2485) extends and modifies the application of the new rules 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 an amount equivalent to the redemption proceeds instead of the securities themselves.

Substitution of securities

Where a repo involves substitution of securities, the regulations provide that

Such a transaction also meets the definition of debtor repo or creditor repo; and
Where any of the securities involved are chargeable assets, substitutions will be disregarded for the purposes of CT on chargeable gains, in the same way as transfers into and out of repos. This applies in both creditor repos (CFM46230) and debtor repos (CFM46350).

Redemption of securities

Where securities are redeemed during the term of the repo and the borrower receives an amount equivalent to the redemption proceeds instead of the securities themselves, the regulations provide that

Such a transaction also meets the definition of debtor repo or creditor repo; and
Where the securities are chargeable assets, for the purposes of CT on chargeable gains, they are deemed to have been disposed of (in the case of the borrower) or acquired (in the case of the lender) on the date of the redemption, for an amount equal to the redemption proceeds.

References to the borrower receiving an amount equivalent to the redemption proceeds instead of the securities themselves include cases where that amount is netted off against amounts that the borrower is required to pay to the lender.

SI 2007/2485 replaces The Sale and Repurchase of Securities (Modification of Enactments) Regulations 1995 (SI 1995/3220) for repo arrangements entered into by companies where the initial sale of securities takes place on or after 1 October 2007. In practice the regulations will apply only where the repo agreement expressly provides that redemption proceeds will be returned by the borrower. In cases where there is provision in the agreement for physical settlement (i.e. repurchase of the securities) the primary legislation in CTA09/PT6/CH10 will apply without the need to invoke the regulations.

For repos entered into on or after 1 October 2007 by taxpayers within the charge to income tax and capital gains tax, SI 1995/3220 is replaced by The Sale and Repurchase of Securities (Modification of Enactments) Regulations 2007 (SI 2007/2486). There is no substantive difference between SI 2007/2486 and SI 1995/3220 as it applied to such taxpayers