Co-Op 42TF

[Gan020]

I'm in agreement that the coupons are repayment of capital but are they QCB? or do they fall foul of the "deeply discounted securities rule"?

It would seem illogical that the bonds could be issued at zero value and circumvent CGT else everyone would be doing it until the goverment closed it down.

I think to get the answer you have have to go back to how the notes were created.

[Zow1]

CGT on 42TF


Sorry, but how is the new accountant determining that the payments are interest? They are repayments of principal surely, there is no interest payable on the notes, they are amortising zero-coupon notes (see the OP), so any amount received is a payment of capital value. However assuming they are QCBs these should not be subject to capital gains tax either so unless I am very much mistaken there is never any tax to pay or transactions to declare. (If they were exchanged for old preference shares then there would have been a capital gains-eligible disposal at the time of the exchange.)

GS

I/the accountant did not say the payments are interest. I wanted to confirm how they should be stated. If capital gain then what is the cost of acquisition? If bought them 3 years ago in anticipation of receiving 6 lots 1p capital return (up to dec 2025 maturity) then is my cost the purchase price divided by 6?
The question of QCB is a also a consideration but i thought these did not qualify....happy to be corrected on this or all points.

[GoSeigen]

I/the accountant did not say the payments are interest. I wanted to confirm how they should be stated. If capital gain then what is the cost of acquisition? If bought them 3 years ago in anticipation of receiving 6 lots 1p capital return (up to dec 2025 maturity) then is my cost the purchase price divided by 6?
The question of QCB is a also a consideration but i thought these did not qualify....happy to be corrected on this or all points.

If they were purchased after issue and are NOT QCBs then wouldn't each repayment be treated like a part-disposal? They'd be reported as a capital gain. So the "disposal" would be matched up with the corresponding purchase and the capital gain calculated accordingly; if all were purchased at one time then it would be pretty much as you put it above.

Now I'm only commenting from my general knowledge of the subject, there might easily be specific issues that I am missing -- not least I have no idea what their QCB status actually is.

GS

[BondSquared]

1) 42TF bears no interest, only capital repayments, effectively making it an amortising zero coupon bond.
2) I'm assuming 42TF is a QCB, as the QCB definition is very wide - but there's a risk it isn't. I don't see any angle why it shouldn't be a QCB.
3) The tough bit is whether 42TF is a DDS (Deeply discounted security), which would make holders liable to income tax (not capital gains) on the gain. There is no formal (discounted) issue price for them, as they came out of a restructuring/conversion. But, given they had a positive IRR from day zero, where should the return have come from (given there's no interest payable) if not from a discount at issuance? If not a formal/explicit discount, there would have then been an implied discount at the point of issuance. To me that's the main tax vulnerability and potential HMRC angle of attack on these. Against that one could argue that the issuance was made at zero return/IRR (capital return only) as a restructuring for investors in the old Coop perp who accepted the zero-return (and hence par issuance, without discount, and no DDS status) to get access to their monies via a capital repayment, forgoing any interest (otherwise they would have opted for 42TE). All that is in reference to primary issuance (which is the reference point to the determination of DDS status), in the secondary markets they obviously always traded with a positive return/IRR, but that's irrelevant for DDS designation. In plain words: is 42TF an amortising zero coupon bond issued at par or below par?

https://www.gov.uk/hmrc-internal-manual ... l/saim3010

[Zow1]

Thanks for the input guys.

To put it bluntly is it fair to say that there is no definitive answer as far as tax reporting/calculations are concerned re: QCB/DDS/Capital gain/income ?
Particularly with such an irregular security as 42TF, we (and our accountants) can only make informed guestimates about what is the 'correct' way to report these on our tax forms.
We will be right until HMRC decide that we are wrong ....then we can agree with what they say (and pay the extra tax/fines) or try to argue the point all the way up the courts if we wish to.

Is that a fair realistic assessment?

[BondSquared]

Yup.

And HMRC themselves would need to form an opinion themselves first - in practice, they would give it to an SME within HMRC who would come up with some opinion after 6-12 months.

Having a well-documented analysis at hand beforehand - most importantly, the issuance prospectus with references to the relevant clauses - helps tremendously getting to the right outcome, as HMRC will have to argue against your points first, and often giving up unless the materiality is such that they're willing to spend significant time/money/external counsel on it.

[Seasider]

For some reason I am convinced that there is no income tax or CGT on the repayments of capital for this bond. I am certain we were told this at the time of their creation. I remember thinking that OldBoyReturns (who is credited with sorting out the Co-op mess at the time) was a clever old boy.

Then again until recently I was convinced my Equitable Life pension policy still had a GAR!

[BondSquared]

Rumour had it at the time that UBS, who was advising on the Coop restructuring, had comissioned a tax opinion by a law firm which confirmed that these would not be subject to CG/income tax for UK private holders, but it was never officially published (and is just a legal opinion anyway). @OldBoyReturns ?

[BondSquared]

Having checked the prospectus (joint prospectus for 42TF and 42TE), I take it all back!

It clearly states on the front page "Issue price of each series of Notes: 100 per cent." and then again pg 81 / paragraph titled "What are the main features of the Notes?", sub-paragraph "Main features of the Instalment Repayment Notes":

"(c) the Instalment Repayment Notes will be issued at the issue price of 100 per cent. of the principal amount of the Instalment Repayment Notes"

as well as the specific terms of 42TF pgs 114/5 [my emphasis in bold]

"INSTALMENT REPAYMENT NOTES

B. Further United Kingdom Tax Consequences of holding the Instalment Repayment Notes
2. Individuals
Taxation of discount
Although the position is not entirely free from doubt, the Notes should not be regarded as “deeply
discounted securities” and should be regarded as issued at the stated issue price (being the aggregate
cash consideration to which Holders of Preference Shares or 13% Bonds who elect to sell their
Preference Shares or 13% Bonds (as appropriate) are entitled for the sale of their Preference Shares
or 13% Bonds (as appropriate))."

but also (pg 113)

"Taxation of discount
The Notes may constitute “deeply discounted securities” for the purposes of Chapter 8 of Part 4
Income Tax (Trading and Other Income) Act 2005. Whether the Notes are deeply discounted
securities will depend on the market value of the Preference Shares and 13% Bonds exchanged for the
Notes at the time of the exchange compared to the amount payable on redemption. If the Notes are
deeply discounted securities, any gain realised on redemption or transfer of the Notes by a Noteholder
who is within the charge to United Kingdom income tax in respect of the Notes should generally be
taxable as income but such Noteholder will not be able to claim relief from income tax in respect of
costs incurred on the acquisition, transfer or redemption, or losses incurred on the transfer or
redemption, of the Notes. Noteholders should consult their own tax advisers to determine whether the
Notes are deeply discounted securities.

Nothing is entirely free from doubt, of course ... but at least HMRC would now have to contest the validity of the explicitly stated issue price in a binding legal document (prospectus) - which is still possible but is more of a stretch than having to come up with an argument for an implicit issue price to start with.

[OldBoyReturns]

Rumour had it at the time that UBS, who was advising on the Coop restructuring, had comissioned a tax opinion by a law firm which confirmed that these would not be subject to CG/income tax for UK private holders, but it was never officially published (and is just a legal opinion anyway). @OldBoyReturns ?

For some reason I am convinced that there is no income tax or CGT on the repayments of capital for this bond. I am certain we were told this at the time of their creation. I remember thinking that OldBoyReturns (who is credited with sorting out the Co-op mess at the time) was a clever old boy.

Ha! I had to sign all sort of NDA's in order to become involved in shaping the restructuring. What I will say is the firm idea behind the novel instalment repayment notes (IRN's) was that the annual payments would be treated as returns of capital for tax purposes for holders who opted to receive IRN's in exchange for their existing securities ...

[Laughton]

Managed to pick up some more of these today @ 2.65p for what I make an IRR of 10.33% including costs.
Very happy with that.

Hopefully my calculator is working correctly.