Income Tax Act 2007

Chapter 5 Price differences under repos

Main tax treatment

607 Treatment of price differences under repos

(1) This section applies if—

(a) there is a repo in respect of securities, and

(b) under the repo, the original owner has transferred the securities to the interim holder.

(2) Any difference between the sale price of the securities and the repurchase price of the securities is treated for income tax purposes as follows.

(3) If the repurchase price is more than the sale price, the difference is treated as a payment of interest made by the repurchaser on a deemed loan from the interim holder of an amount equal to the sale price.

(4) If the sale price is more than the repurchase price, the difference is treated as a payment of interest made by the interim holder on a deemed loan from the repurchaser of an amount equal to the repurchase price.

(5) In either case, the payment of interest is treated for income tax purposes as—

(a) becoming due when the repurchase price becomes due, and

(b) paid when that price is paid.

(6) Subsection (7) applies in calculating the sale price for the purposes of this section if the repo involves the exercise of an option (see section 569(4)(b) and (c)).

(7) The amount of any consideration given for the option is—

(a) in a case falling within section 569(4)(b), added to what would otherwise be the price, and

(b) in a case falling within section 569(4)(c), subtracted from what would otherwise be the price.

(8) This section is subject to section 608 (exceptions) and Chapter 6 (powers to modify repo provisions: non-standard repo cases and redemption arrangements).

608 Exceptions to section 607

(1) Section 607 does not apply in a case within subsection (2) or (3).

(2) A case is within this subsection if the agreement or agreements for sale and repurchase are not what one would expect of persons dealing at arm’s length.

(3) A case is within this subsection if the interim holder has all the benefits and risks from fluctuations in the market value of the securities between their sale and repurchase.

(4) This section is subject to any regulations under—

(a) section 611 (power to modify Chapter 5 in non-arm’s length case), and

(b) sections 612 to 614 (powers to modify repo provisions: non-standard repo cases and redemption arrangements).

Additional tax treatment

609 Additional income tax consequences of price differences

(1) Subsections (2) and (3) apply if an amount is treated under section 607 as a payment of interest.

(2) If the repurchase price is more than the sale price, the repurchase price is treated for other income tax purposes as reduced by the amount of the payment of interest.

(3) If the sale price is more than the repurchase price, the repurchase price is treated for other income tax purposes as increased by the amount of the payment of interest.

(4) “Other income tax purposes” means income tax purposes other than the purposes of—

(a) sections 601 to 605 (deemed manufactured payments: repos), and

(b) this Chapter.

(5) The Treasury may by regulations provide for any amount which is treated under section 607 as received as a payment of interest to be treated, in such circumstances and so far as may be described in the regulations, as exempt pension income.

(6) “Exempt pension income” means income which is eligible for relief from income tax as a result of section 613(4) or 614(2), (3) or (4) of ICTA or section 186 of FA 2004 (exemptions about pensions and annuities).

(7) Section 261G of TCGA 1992 deals with the effect on the repurchase price for capital gains tax purposes of an amount being treated under section 607 as a payment of interest.

Interpretation

610 Repurchase price in deemed manufactured payment case

(1) This section applies if section 602 (deemed manufactured payments: repos) applies to a case in which section 607 applies.

(2) References in sections 607 to 609 to the repurchase price are to be read as references to the repurchase price which is applicable as a result of section 604(2), (4) or (5).

Power to modify

611 Power to modify Chapter in non-arm’s length case

(1) The Treasury may by regulations provide for—

(a) sections 607 to 610 (price differences under repos), or

(b) any of those sections,

to apply with modifications if the exception in section 608(2) (agreement not at arm’s length) would otherwise prevent section 607 from applying.

(2) Regulations under this section may make different provision for different cases.

(3) Regulations under this section may contain incidental, supplemental, consequential and transitional provision and savings.

(4) The incidental, supplemental and consequential provision may include modifications of—

(a) section 604 (deemed increase in repurchase price: price differences under repos), and

(b) section 605 (deemed increase in repurchase price: other income tax purposes).

(5) In this section “modifications” includes exceptions and omissions.

(6) Accordingly, the power in subsection (1) includes power to provide for any of sections 607 to 610 not to apply in relation to the case mentioned in that subsection.