Loan notes and Qualifying Corporate Bonds (QCBs) and non-QCBs

By Tolley

(Updated for Budget 2020)

The following Corporation Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

Loan notes and Qualifying Corporate Bonds (QCBs) and non-QCBs
QCBs
QCB gains and entrepreneurs’ relief
Bad debts
Non-QCBs
Other implications of loan notes

On the disposal of the shares in a company, a seller may receive loan stock in the acquiring company as consideration or part consideration for the sale. For tax purposes, loan notes are either QCBs or non-QCBs.

The way in which the loan notes are treated for tax purposes depends on whether the loan notes are classified as QCBs or non-QCBs. HMRC needs to be satisfied that the issue of the loan note is not for the purposes of tax avoidance. Therefore, it is always advisable to seek clearance from HMRC under TCGA 1992, s 138 when entering into a transaction involving loan notes. For more information on this, see the Paper for paper treatment clearances guidance note. Much of the commentary below relates to the tax position of the individual investor rather than the company; however, it is important for company directors and their advisers to understand the tax implications for investors when structuring transactions, and to encourage the individuals involved to obtain their own tax advice.

QCBs

For loan stock to meet the definition of a QCB, it must satisfy three conditions:

•the loan stock must have been issued after March 1984

•the loan stock must be expressed in sterling

•the loan stock cannot be converted into any other currency

TCGA 1992, s 117

A provision which provides for sterling bonds to be redenominated in the euro or another currency in the event that the UK adopted the euro or another currency as its lawful currency does not of itself prevent the bonds from being QCBs ― see Nicholas Trigg v HMRC. It is not yet known if HMRC will appeal this decision.

Nicholas Trigg v HMRC [2018] EWCA Civ 17

QCBs are attractive for individuals as they are exempt assets for CGT purposes. Therefore, gains arising on redemption of this type of loan note are not taxable and losses are not allowable.&n