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

By Tolley

The following Owner-Managed Businesses 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 sale of a company, a seller may receive loan stock in the acquiring company as consideration for the sale. For tax purposes, loan notes are either QCBs or non-QCBs.

Generally, if a purchaser satisfies part of their consideration in the form of loan notes, a proportionate part of the seller’s gain is deferred until the loan note is redeemed. The way in which this is done depends on whether the loan notes are QCBs or non-QCBs.

HMRC needs to be satisfied that the issue of the loan note is not for the purpose of tax avoidance and so it is always advisable to seek clearance from HMRC under TCGA 1992, s 138. For guidance on this see the Paper for paper treatment guidance note.

QCBs

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

•must have been issued after March 1984
•must be expressed in sterling, and
•cannot be converted into any other currency

TCGA 1992, s 117

For individuals, QCBs are exempt assets for CGT purposes. Gains on QCBs are not taxable and losses not allowable.

TCGA 1992, s 115

Where the consideration for the sale of a company includes cash, a chargeable gain will arise in respect of the cash element calculated using the part disposal rules. A gain is calculated in respect of the QCB element, but this is ‘frozen’ until the redemption or disposal of the QCB. See Example 1.

QCB gains and entrepreneurs’ relief