Chapter 9 Gilts and QCBs Flashcards
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QCB – a qualifying corporate bond is a type of security (also referred to as loan stock or debentures). If an investor buys loan stock in a company, the investor is lending money to the company and this money will be paid back at a future date. If a company issues loan stock to an investor, the company will pay the investor interest on the loan as opposed to dividends. 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 and
• The loan stock must be expressed in sterling and
• The loan stock cannot be converted into any other currency
When a UK company pays interest on loan stock to its investors, assuming those investors are individuals, it must withhold 20% tax at source. The investor therefore receives the interest net of tax.
Gilts – a gilt-edged security is another example of loan stock, but it is issued by the government. Examples are UK Government Treasury Stock or Exchequer Stock. They are denominated in sterling and are non-convertible, they carry a fixed rate of interest from the date of acquisition.
CGT Treatment of gilts and QCBs – gilts and qualifying corporate bonds are exempt assets for CGT, no CGT is paid, and no loss is allowable.
QCBs and takeovers – a QCB may be offered by a company as part of the consideration on a takeover. On receipt of a QCB on takeover, we assume the shareholder has received an amount of cash equal to the value of the QCB. We therefore calculate the capital gain that would have arisen on the receipt of this, however because the shareholder does not physically have the cash, we do not charge tis gain immediately. Instead, we freeze it and the gain is eventually charged to tax when the shareholder disposes of the QCB in the future. If the investor sells part of his QCB, only part of the frozen gain becomes taxable. However, as the QCB is an exempt asset the sale does not give rise to a chargeable gain.
Practical points – if the acquiring company goes into liquidation, it is likely that it will be unable to repay the loan to the investors and the QCB will become worthless. The investors will be deemed to have disposed of their QCB and the loss incurred will be treated as a debit on a loan relationship. The frozen gain becomes a chargeable gain.
