Capital gains and ER - Loan notes

Capital gains and ER - Loan notes

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My client was employed by a limited company and owned 5% of the ordinary share capital.

In 2013-14 he sold his shares in exchange for loan notes which are themselves been settled over a period of time. 

I'm not sure whether the loan notes are qualifying or non-qualifying corporate bonds. 

My understanding is that he can either defer the capital gain until the loan notes are sold - in which case he wouldn't be able to claim entrepreneurs relief and would be liable to CGT at 28%.

Or he can make an election under either S169R (for qualifying corporate bonds) or S169Q (non qualifying corporate bonds) to chrystalise the gain in 2013-14 and therefore claim ER, and pay CGT at 10%.

Am I on the right track here?

Do I need to establish whether the loan notes are qualifying corporate bonds so that I can quote in the election?

Replies (5)

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By Exector
21st Jan 2015 09:47

Yes - you have the right legislation

Essentially share for share/share for loan note exchanges are automatically covered by the s.135 TCGA 92 security exchanges legislation unless the relevant  conditions are not met, i.e. no claim is required. As in your case, as this caused problems where ER was available on the original shares but not the exchange securities, the provisions in S.169Q & R were specifically introduced to allow a disclaimer in such circumstances, obviously not then deferring the gain, but allowing ER to be claimed, if available. Downside of course is no sale proceeds out of which to pay any net CGT.

Not sure if HMRC would necessarily look in detail at the exact nature of the loan notes for purposes of relevant disclaim statute. However, most loan notes by default will be QCB's, they are usually deliberately made non-QCBs by introducing a specific clause do so, such as being redeemable in a foreign currency. If nothing of that sort, prob a QCB, but you could always submit an election providing for both eventualities if you were unable to confirm the position & simply advise HMRC of that.

 

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Replying to Accountant A:
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By robvaughan
21st Jan 2015 10:00

Thank you. That's very helpful. 

The loan notes are payable over 4 years - so if I didn't make the election and claim ER would the CGT exemption be available each year?

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Replying to rae10000:
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By robvaughan
21st Jan 2015 10:48

I've now checked the paperwork and there is a currency conversion clause so these are presumably non-qualifying corporate bonds.

So, I either make a election under S169Q and claim ER, taking the risk that some of the loan notes won't be paid.

Or I calculate the capital gain when the loan notes are due to mature  - or should it be when they are actually paid as there are some differences in dates? And in the latter case, am I right in thinking that the client will be able to claim the annual exemption for each year?

 

 

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Replying to jcace:
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By robvaughan
21st Jan 2015 10:50

Thank you. I hadn't seen your second post before I posted my last one. It looks as if I am on the right track.

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By Exector
21st Jan 2015 10:34

Broadly yes

If QCB & redeemed over a period, the appropriate proportion of  the held over gain calculated at the time of the exchange is brought into charge when a corresponding part of the loan note is redeemed. If this is in different tax years, then of course they are calculated separately & separate annual exempt amounts would come into play.

If non-QCB & s.135 applies & not disclaimed, the non QCBs would acquire the original exchanged securities acquisition base costs and any CG on disposal calculated in the normal way, so again if in different tax years, the AEA in each would be available separately.

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