Section 263CA TCGA
7.Subsection (1) of new section 263CA provides the conditions for the section to apply. These are that there is a stock lending arrangement whereby securities are loaned by a lender to a borrower and:
the borrower becomes insolvent and therefore cannot return the securities to the lender;
collateral is used to enable the lender to acquire “replacement securities” (securities identical to those loaned to the borrower); and
the replacement securities are acquired within 30 days of the borrower becoming insolvent.
8.Subsection (2) provides that section 263B(2) applies so that the transfer of the loaned securities from the lender to the borrower under the stock lending arrangement is not treated as disposal of those securities by the lender. The effect is that no chargeable gain or loss arises to the lender as a result of that transfer. This treatment is modified where subsection (5) applies (see paragraphs 11 to 15 below).
9.Subsection (3) provides that when the borrower becomes insolvent he is treated as having acquired the loaned securities which he cannot return to the lender. The borrower is treated as having acquired those securities for consideration equal to their market value at the date the borrower becomes insolvent.
10.Subsection (4) provides that the acquisition of the replacement securities by the lender is treated as though those securities were returned to the lender in accordance with the terms of the stock lending arrangement. This has the effect that the lender is not treated at acquiring those securities at that time, but as though he had held them continuously since he acquired the loaned securities originally.
11.Subsections (5) to (7) address the possibilities that:
there is sufficient collateral to replace all the loaned securities but the lender decides to replace only some of them;
all available collateral is used but it is insufficient to enable all the loaned securities to be replaced;
there is insufficient collateral to enable all the loaned securities to be replaced, but the lender chooses only to use some of the available collateral rather than replacing the maximum number available by use of the whole of the collateral.
12.In each of these cases, the lender is treated as having disposed of the number of securities that are not replaced by utilisation of collateral. This deemed disposal takes place at the date of the borrower’s insolvency.
13.Subsection (6)(a) provides that, where the whole of the collateral is used to acquire replacement securities (but it is not enough to replace all the securities), the consideration for the deemed disposal provided for in subsection (5) is nil, so that a loss arises to the lender at that time, based on the lender’s cost of acquiring the securities that are not replaced.
14.Subsection (6)(b) has effect if only some of the available collateral is used to acquire some replacement securities. In that case, the consideration received for the deemed disposal under subsection (5) is the difference between:
the value (at the time of the insolvency) of the replacement securities that could have been acquired by using the whole of the collateral; and
the value (at that time) of the replacement securities that are in fact acquired by use of the collateral.
The difference will be broadly equal to the value at the time of the insolvency of the amount of collateral not used to acquire replacement securities.
15.Subsection (7) addresses the possibility that the lender may receive a payment in respect of the amount that the borrower owes to the lender, under the terms of the stock lending arrangement, in relation to the securities that could not be replaced because the amount of collateral was insufficient. On receipt of any such payment, a chargeable gain equal to the amount of the payment is treated as arising to the lender at the time the payment is received.
16.Subsection (8) provides that the borrower’s liability to the lender resulting from the insufficiency of collateral is not to be treated as a relevant non-lending relationship within Part 6 of the Corporation Tax Act 2009 (CTA). This prevents any of the corporation tax loan relationship rules from applying in a transaction that is within section 263CA of TCGA.
17.Subsection (9) explains what is meant by references in the section to the borrower becoming insolvent.
18.Subsection (10) provides the definition of “collateral” for the purposes of the section, and ensures that terms used in both section 263B and section 263CA have the same meaning in both sections.
19.Paragraph 4(1) of the Schedule provides the commencement for section 263CA and for the changes made by paragraph 2(2) and (3)(c) which import reference to that section into section 263B. They have effect in all cases where the borrower becomes insolvent on or after 24 November 2008. Additionally, where the borrower became insolvent between 1 September 2008 and 23 November 2008 (inclusive), the lender may elect for the changes to apply.
20.The changes to section 263B made by sub-paragraphs (3)(a), (3)(b) and (4) of paragraph 2 are clarificatory, and do not affect the operation of that section. They have effect on and after the date of Royal Assent.
21.Paragraph 4(2) provides rules relating to an election under paragraph 4(1) for the new rules to have effect in relation to an insolvency falling between 1 September 2008 and 23 November 2008 inclusive. These are the normal time limits for amendments of Self Assessment tax returns for the accounting period or tax year in which 24 November 2008 falls.
22.Paragraph 4(3) provides for references in section 263CA(8) to provisions of the CTA to be taken as references to the corresponding provisions that applied for periods before the CTA came into force on 1 April 2009. This ensures that section 263CA operates in the same way in relation to times before and after the CTA has effect.
