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bigduckontax, Accountant
Category: Tax
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Not sure if you can give a quick answer but I have loan notes

Customer Question

Not sure if you can give a quick answer but I have loan notes in a business that I am considering selling.

The majority of the loan notes (around £1million) were as a result of a rollover some 10 years ago and no tax was paid. Three years ago I bought some more loan notes (in the same company) from my savings of around £100k

I am considering an offer of 30p in the pound for them but need to understand the tax implications first.
Submitted: 4 years ago.
Category: Tax
Expert:  bigduckontax replied 4 years ago.
Hello, I'm Keith and happy to help you with your question.

The position might be simple, on the other hand, it might not depending on the reason why the loan notes were issued. In general terms HMRC advise:

A company carrying out a take-over may issue securities, such as loan notes. In such cases the recipient usually receives information about the take-over that explains if they're 'Qualifying Corporate Bonds'.

If the loan notes are Qualifying Corporate Bonds, you work out the gain as if you'd sold your original shares at their market value immediately before the take-over. But the gain isn't chargeable to Capital Gains Tax until you sell or dispose of the Bonds.

If the loan notes aren't Qualifying Corporate Bonds, they're treated in the same way as shares issued in a take-over.

From this we may deduce that disposal of loan notes comes under Capital Gains Tax (CGT) rules and dealing in them is akin to dealing in shares.

On sale you would take the net sum received and compare with the sum paid originally for the notes. If a loss has been made it can be set against other Capital Gains. If a profit has been made then it is liable to CGT, but there is an annual allowance of GBP 10,900 which can be used to offset any tax liability.

Customer: replied 4 years ago.
Ok thnk you I assume the principle here is I pay tax on the money I gain. So for example I rolled over on the 1million, I don't pay I pay tax on that but I pay on the proceeds. On the £100k I paid 50p per share so that element would be tax free ?
Expert:  bigduckontax replied 4 years ago.
In a roll over situation tax is not payable at the time of roll over, but is deferred to the final disposal, but the original net cost comes into the calculation.

From what you say you bought at 50p so that is your purchase figure, less cost of purchase (eg brokerage fees etc). This is the one used by you for your personal CGT calculation. You would appear to be making a loss if you sell at 30P, but for CGT purposes it effectively adds to your annual allowance of GBP 10,900 to offset against any other capital gains. Any unused losses can be carried forward to future tax`years.