LAM03100 | Calculation of ‘I’ Income and chargeable gains: Stock lending and Repos: TCGA92/S263B-C, CTA09/S546

Life companies may have stock lending and/or repo income or profits although they are not usually a significant component of ‘I’.

Stock Lending

There are long-established and well-regulated arrangements under which institutional investors, such as insurance companies and pension funds lend securities to dealers who are market makers. Stock loans involve a temporary transfer of the legal ownership of securities, while the economic ownership is retained by the original owner. TCGA92/S263B and 263C provide for the non-recognition of all stock lending transactions for the purposes of corporation tax on chargeable gains (relevant only to equity lending) except where it becomes apparent that the securities will not be retransferred. See CFM74140 onwards.

Repos

A company carrying on life insurance business may also enter into a lending “repo” transaction in order to earn a secure return for cash better than it could get from depositing it with a bank. Under such a repo the “lending” life company acquires securities for cash with a related agreement to resell them, the transaction being in substance a loan secured on the collateral of the securities (see CFM46010 onwards). A repo differs from a stock loan in that the transaction is legally one of purchase and sale for a cash consideration. The legislation on repos is in CTA09/Part 6/Chapter 10. CTA09/S546 provides that the price differential is taxed as if it were interest. The sale or resale is still ignored for the purposes of corporation tax on chargeable gains (FA2007/SCH13/PARA11) and for the purposes of CTA09/Part 5 (loan relationships) CTA09/S545.

In practice, the treatment for a life company is no different to that for any other company with net profits in the accounts being included in the I-E tax computation as non-trading loan relationship income.