In HMRC v Trigg, the Upper Tribunal considered that the inclusion of clauses which operated if there were to be a change in currency in the UK or if the UK were to become an EU Member State was enough to make the Qualifying Corporate Bonds into non-Qualifying Corporate Bonds.
UK Capital Gains Tax (CGT) rules recognise two different types of bond: Qualifying Corporate Bonds (QCBs) and non-Qualifying Corporate Bonds (non-QCBs). QCBs are exempt from CGT, but losses on them are not allowable. Non-QCBs are chargeable to CGT and, correspondingly, losses on them are allowable.
The distinction between them can also be important where a person swaps shares or securities of one company for bonds of another. In both cases any capital gain on the old shares or securities can be "rolled" into the new bonds. However, the mechanism for this "rollover" differs and can result in different tax treatment on a later event.
The choice between the two types can therefore be very important. Neither is "better" than the other: either type may be preferable depending on the circumstances.
HMRC v Trigg
The main method to make a bond a non-QCB is either to express it in a foreign currency or to have a foreign-currency conversion clause. Under s117(1)(b) TCGA 1992, a bond cannot be a QCB unless it is “expressed in sterling and in respect of which no provision is made for the conversion into, or redemption in, a currency other than sterling”.
The Trigg case (in which the desired treatment was as a QCB) concerned some wording designed to deal only with the situation where the UK adopted the Euro as its official currency.
The facts revolved around the purchase of corporate bonds by the taxpayer which were exempt from CGT by virtue of being QCBs. The QCBs included two different types of wording. Firstly:
“if at any time there is a change in the currency of the UK…the [outstanding interest and coupons] will be paid in the currency…of the UK…any such conversion will be made at the official rate of exchange...”
Secondly, if the UK were to become an EU Member State:
“which has adopted the euro as its lawful currency…the Notes would be deemed to be redenominated in euros at the conversion rate...and coupons and interest would be re-issued or paid in euros."
Did this wording amount to a foreign-currency conversion clause, making the bonds into non-QCBs?
When considering the meaning of ‘sterling’ in s117(1)(b) above, the Tribunal applied the principles of statutory construction, namely that where Parliament had drafted a provision more narrowly than the general policy reason behind that provision, it should not be part of a purposive approach to give a wider meaning or perceived wider outcome when interpreting the language of that provision. As such, the Tribunal (agreeing with the First Tier Tribunal) found that the word ‘sterling’ could not be interpreted to mean ‘the lawful currency of the UK from time to time’.
The next issue for the Tribunal to consider was whether the phrase ‘currency other than sterling’ imported the requirement for the sterling currency to exist as a separate currency to that which the QCBs were converted. The Tribunal found that such a distinction between ‘sterling’ and ‘currency other than sterling’ could not be construed.
The Tribunal went on to consider whether the scope of s117(2)(b) disregarding "a provision for redemption in a currency other than sterling but at the rate of exchange…” for the purposes of determining whether a bond met the QCB criteria. The Tribunal found that the purpose if this exception was to enable redemption into foreign currency at the rate applicable as if it were redeemed in sterling because this was virtually the same as redemption into sterling. This meant that s117(2)(b) could not be purposively constructed to apply to conversions as well as redemptions.
Having reached the above conclusions, the Tribunal found that because the wording in the QCBs applied irrespective of whether sterling was (or was treated) the same as the euro or any other currency adopted by the UK, they must be regarded as provisions for the conversion into a currency other than sterling, which could not refer to the currency of the UK from time to time. Therefore, the inclusion of such wording prevented to QCBs from satisfying the required criteria and they lost their QCB status.
This case serves as a timely reminder to draft the wording of loan instruments carefully to cover all relevant exceptions that could apply, particularly if euro-conversion clauses are incorporated.
Those who want QCB status should check back on their bonds to ensure that they do not have euro-currency wording in them.
Additionally, purchasers ought to be wary of applying the CGT exemption provided by QCBs too readily because the QCB status can be easily lost.