What are Qualifying Corporate Bonds (QCBs)? What is the significance of loan notes being QCBs or non-QCBs?
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At a glance
Loan stock: Qualifying Corporate Bonds (QCBs) or non-QCBs?
Loan notes may be structured as Qualifying Corporate Bonds (QCBs) or non-Qualifying Corporate Bonds (non-QCBs).
- When a seller exchanges their shares for QCBs or non-QCBs, providing that the right conditions are met, their capital gain is deferred until the disposal of the loan note.
- Following changes made in Finance (No.2) Act 2010, it is no longer possible to claim Business Asset Disposal Relief (BADR) on deferred gains.
QCBs
- Disposals of QCBs are exempt from Capital Gains Tax (CGT).
- Under special rules for reorganisations when shares are sold in exchange for QCBs, a capital gain is calculated as if it is chargeable at the time of the exchange. The gain is deferred and becomes chargeable when the QCB is redeemed, disposed of or ceases to qualify as a QCB.
- For QCB exchanges made on or after 23 June 2010, BADR no longer applies to deferred gains. To avoid losing BADR the individual can make an election to treat the date of exchange as if it were a disposal. This will mean paying CGT before the QCB is redeemed.
- The BADR election must be made by the first anniversary of 31 January following the end of the tax year.
Non-QCBs
- A gain can be deferred on a share for non-QCB exchange so that it will crystallise when the security is redeemed or disposed of, or ceases to qualify as a security.
- A gain so deferred is reduced or eliminated if the loan note turns bad (unlike the position for a QCB).
- A further rollover can be possible if non-QCB loan notes are exchanged on a subsequent take-over.
- There is no BADR when a non-QCB is disposed of, however, you may elect to crystallise your gain in the year of the exchange, similar to QCBs.
Loan note summary
|
Tax feature |
QCBs |
Non-QCBs |
|
Gain deferred until redemption |
Yes |
Yes |
|
Loss relief for bad debt |
No |
Yes |
|
Business Asset Disposal Relief on disposal of loan note |
No, but may elect to crystallise earlier |
No, but may elect to crystallise earlier |
|
Roll-over on subsequent take-over |
No |
Yes |
Useful guides on this topic
Loan Stock: QCBs or Non-QCBs
What is the difference between a Qualifying corporate bond (QCB) and a non-QCB? Which is better and why?
Reorganisations
This section looks at: reorganising companies and shareholdings, including demergers of different business activities, such as removing investment assets from trading companies, or separating trades, moving different companies between shareholders, creation and breakdown of groups, capital reduction demergers.
Legislation
Section 116(10) TCGA 1992: Reorganisations, conversions and reconstructions.
Section 169R TCGA 1992 (as amended by Finance (No. 2) Act 2010): Reorganisations involving acquisitions of QCBs.
