Call for evidence outcome

The taxation of Decentralised Finance involving the lending and staking of cryptoassets - call for evidence

Updated 27 April 2023

Summary

Subject of this call for evidence

The government is seeking views on the taxation of cryptoasset loans and ‘staking’ within the context of Decentralised Finance (DeFi). DeFi lending and staking encompasses a range of activities that reward users who deposit cryptoasset tokens into a pool or lend them to other individuals or platforms for a certain period to earn passive income returns often described as interest.

In particular, the government is interested in ascertaining whether administrative burdens and costs could be reduced for taxpayers engaging in this activity, and whether the tax treatment can be better aligned with the underlying economics of the transactions involved.

Scope of this call for evidence

On 4 April 2022, the government announced a package of measures designed to ensure the UK financial services sector remains at the cutting edge of technology, attracting investment and jobs and widening consumer choice. These included an intention to consider and, where appropriate, address concerns that have been raised by stakeholders about the tax treatment of DeFi loans and staking. This call for evidence seeks to inform that review.

Who should read this

HMRC would like to hear from investors, professionals and firms engaged in DeFi activities including technology and financial service firms; trade associations and representative bodies; academic institutions and think tanks; and legal, accountancy and tax advisory firms.

Duration

The call for evidence will run for 8 weeks from 5 July 2022 to 31 August 2022.

Lead official

Alex Bosinceanu, HM Revenue and Customs (HMRC).

How to respond or enquire about this call for evidence

Please email: [email protected]

Additional ways to be involved

HMRC will consider holding meetings with interested parties to discuss the issues raised in this call for evidence. The timing, format and venue of meetings will be informed by expressions of interest received. 

After the call for evidence

Following this call for evidence, the government will publish a summary of responses together with details of its next steps.

Getting to this stage

This call for evidence follows an announcement on 4 April 2022. This is the first stage in the tax policy making process.

Previous engagement

HMRC has held informal discussions with some individual interested stakeholders to identify the key concerns and options for change.

1. Introduction

Financial innovation has been rapid over recent years. Cryptoassets, offering new digital representations of value or contractual rights that can be used for peer-to-peer transactions, have been part of this trend and could play an increasingly important role in the future. New forms of cryptoassets, and services that are supported by them, continue to evolve.

The government’s FinTech Sector Strategy was introduced by the Chancellor of the Exchequer in March 2018. It sets out the government’s ambition to work with the UK’s financial services sector to maintain the UK’s position as one of the leading financial centres globally, and to ensure that the UK is the world’s most innovative economy.

On 4 April 2022, the Economic Secretary to the Treasury announced the next steps for the government’s FinTech Sector Strategy at the Innovate Finance Global Summit. The government aims to establish clear tax and regulatory treatment of cryptoassets to place the UK at the forefront of safe, sustainable, and rapid innovation in cryptoasset and blockchain technologies.

One of the measures announced was to explore and resolve specific issues regarding the taxation of the DeFi activities of loaning and staking. Some stakeholders have told the government that there are circumstances where the current rules for Capital Gains Tax (CGT), when applied to DeFi lending and staking, are inconsistent with the substance of the activity.[1]

We have been told that there are situations where the tax rules treat transactions as disposals where the effective economic ownership of cryptoassets is retained. This can lead to tax outcomes that do not reflect the economic effects, and to a tax liability from a transaction where no gain has been realised in a form which can be used to meet the liability. The need to determine and record the market value of assets at each step in the transaction may also give rise to a disproportionate administrative burden.

The purpose of this call for evidence is to obtain more evidence about how this treatment impacts DeFi activities and to inform the government’s options for reducing any friction, including the administrative complexity for some taxpayers, arising from the application of current tax law. The government invites views from a wide range of stakeholders, particularly firms and investors engaged in relevant cryptoasset transactions.

This call for evidence only concerns the tax treatment for investors participating in DeFi lending and staking (described in more detail below). Other DeFi activities are not in scope. Also out of scope is the tax treatment of transactions entered into by an individual or entity as part of a trade, such as running a platform.

For those carrying on a trade in the UK, the outcome of the transactions will be reflected in their trading profits for tax purposes rather than subject to capital gains rules. The question of whether assets are used in a trade is a question of fact determined by reference to case law. However, HMRC would normally expect a platform to be trading.

An individual holding cryptoassets and engaging in DeFi transactions is unlikely to be trading. It should be noted that there will also be no UK tax implications for individuals who are not UK resident but who transact with a UK-based platform.

2. Decentralised Finance and its current tax treatment

What is Decentralised Finance?

Defi is an umbrella term used to describe services akin to traditional financial services that are provided using distributed ledger technology (DLT).

DLT uses cryptography to maintain a decentralised database acting as a ledger. This means that DeFi transactions do not rely on the functions of centralised intermediaries such as banks, brokerages, or traditional exchanges. Entities that provide DeFi services are normally, but not necessarily, companies or other legal persons and are, for the purposes of this paper, termed ‘platforms’. Platforms can provide a wide range of financial services including decentralised exchanges (e.g. cryptoasset trading platforms), savings, lending, and derivatives.

Platforms operate using cryptoassets as the medium of exchange to provide DeFi services. A cryptoasset is a digital representation of value or contractual rights that can be transferred, stored, or traded electronically, using cryptography, DLT, or similar technology. Within this document the term ‘token’ is used interchangeably with ‘cryptoasset’.

There is currently no definition of DeFi in either UK regulatory or tax legislation. Terms used in the sector are largely coined by the participants, and this document follows that terminology. Terms relating to DeFi are not based on any regulatory or statutory definitions unless indicated otherwise.

What is DeFi lending and staking?

DeFi lending services allow cryptoasset owners to loan out their tokens, either directly to other individuals (‘peer-to-peer’) or indirectly through a platform, and receive a financial return often described as interest.[2] A person may also seek to take out a loan of cryptoassets for which they will need to provide collateral. The borrower may then be able to sell or lend the borrowed tokens.

Additionally, cryptoasset owners (known in this context as liquidity providers) can provide their tokens to a platform to pool with those of other users (a ‘liquidity pool’). This provision of liquidity to a platform is known as ‘staking’ and allows the platform to perform other DeFi services with the pooled tokens. For example, the platform can transfer control of the tokens to other participants for a period of time and at a profit. To encourage cryptoasset owners to provide the platform with this liquidity, they will offer a financial return.

At the time of the staking transfer, the liquidity provider will usually receive a token from the platform that provides them with a right to demand an equivalent quantity of the original tokens at a future time as repayment of the staked tokens.

DeFi lending and staking models

HMRC is aware of a number of existing models of DeFi lending and staking. These are set out in HMRC’s guidance. The market is also expected to continue to evolve, leading to the creation of further models. Some of the DeFi models are:

• An individual lends tokens directly to a borrower without a DeFi platform being involved. In this situation the lender transfers control of the tokens to the borrower.
• An individual provides liquidity to a DeFi lending platform. The liquidity provider transfers the control of tokens to a DeFi lending platform for a period of time. The platform pools the tokens with those of other users in a liquidity pool as detailed above.
• An individual provides liquidity to a DeFi lending platform in return for cryptoassets or non-fungible tokens. The liquidity provider transfers the control of tokens to a DeFi lending platform for a period of time, for inclusion in a liquidity pool. In return, the platform transfers control of different tokens or of non-fungible tokens to the liquidity provider.

Cryptoassets and the cryptoasset industry are borderless in nature, with businesses and participants operating in numerous jurisdictions seamlessly. The government is keen to improve its general understanding of the DeFi lending and staking market and participants, as well as issues specific to the UK.

Question 1:

HMRC would like more information about the UK DeFi lending and staking sector. Please provide any information you hold that is relevant to the following questions. Where appropriate, please summarise data using appropriate ranges or categories, rather than providing only totals or minima and maxima.

• How many DeFi lending and staking platforms are you aware of that are based in the UK? What is the approximate value of their assets?
• Approximately how many UK-based individuals engage in DeFi lending and staking, and how much do they lend/stake?
• How many non-UK-based individuals are served by UK platforms and what amounts do they invest?
• How frequently do individuals transact, and what is the duration of each lending or staking transaction?
• Approximately what percentage of UK-based individuals engaging in DeFi are serviced wholly or mainly by UK platforms? Where else are the platforms UK individuals use commonly based?

The taxation of DeFi lending and staking under existing law

The tax outcome for participants in DeFi activities is determined by the facts and circumstances, rather than the terminology used. It is therefore necessary to establish the legal substance of each transaction before applying the relevant tax law.

DeFi is an evolving area and, particularly in novel situations, it may be necessary to conduct an extensive factual analysis to determine the correct tax position, including whether there has been a transfer of beneficial ownership. The tax analysis in this chapter is not intended to be exhaustive, but to provide an overview of the tax rules currently applicable to DeFi lending and staking.

In general, a transaction involving the lending or staking of tokens has 3 main elements that need to be considered for tax:

• the lending of tokens or making the tokens available for staking
• the return from the lending or staking activity
• the repayment of the DeFi loan or the withdrawal of stake

Tax treatment arising from the lending of tokens or from making them available for staking

The tax treatment of lending or staking of tokens is determined by whether the beneficial ownership in the cryptoassets is transferred, which is generally determined by the terms and conditions of the lending or staking agreement.

If there is no change in beneficial ownership, then there are no tax consequences arising from this element of the transaction. For example, this will be the case when the platform holds the tokens on trust for the liquidity provider.

If the beneficial ownership is transferred, then there is a disposal for CGT purposes. This may be the case when the platform is not constrained in what it does with the tokens, including being able to sell them outright to a third party. Most staking results in the lender or liquidity provider receiving new tokens from the platform. When a disposal occurs, the lender or liquidity provider must calculate the difference between the value of the new tokens received at the time of lending/staking and that of the pooled average cost of acquiring the tokens that are disposed of to determine any gain/loss for CGT purposes.

Tax treatment of the return from staking and lending

DeFi market participants may receive a return for the lending or staking of tokens. The type of the return received determines the tax rules applicable. In general for the most common types of arrangements:

• when the return is income in nature, it will be subject to Income Tax (or, for companies, to Corporation Tax as income) when the return arises - in general, the return will be income where it is calculated as a percentage of the lent or staked tokens, for example, a user stakes cryptoassets at a 5% per annum return for 2 years
• when the return is capital in nature, the actual return will be subject to CGT when it is received. Deciding whether a return is capital in nature can be a difficult question - in general, the return is capital if it is realised through the disposal of a capital asset or when the return is determined by the increase in the value of a capital asset

Tax treatment of the repayment of the DeFi loan or of the withdrawal of the stake

When a loan is repaid, or the stake withdrawn, there may be tax consequences for the lender or liquidity provider. The tax consequences will depend on whether the beneficial ownership in the tokens was transferred at the beginning of the transaction.

If the beneficial ownership was transferred, there may be tax consequences. Where the staking resulted in the lender or liquidity provider receiving new tokens from the platform, there will be a disposal of those new tokens for the tokens being returned. This will generally give rise to a CGT gain, or loss, for the lender or liquidity provider calculated as the difference between the value in pounds sterling of the tokens when they were lent or offered for staking and their value in pounds sterling when they are withdrawn.

If the beneficial ownership in the tokens was not transferred at the beginning of the transaction, then there are no tax consequences arising from this element of the transaction.

3. Policy approach

Objectives and principles

The government is reviewing the current tax treatment of DeFi lending and staking in the light of the objectives and principles set out below.

Tax neutrality between economically equivalent activities

The tax system should not distort the market by unintentionally incentivising participants to favour one activity or asset over another which is economically similar. As such, holders of cryptoassets should obtain broadly similar tax outcomes to holders of other financial assets (e.g. shares) when lending or borrowing their respective assets.

The tax system ought to reflect the economic substance of the activity in question

The tax system can treat DeFi loans and staking as disposals for CGT purposes. However, many users consider that when they lend or stake their tokens, they retain ownership and will recover those same assets in due course. They therefore question whether they should be regarded as disposing of the assets and realising a chargeable gain or loss. Under the current rules, DeFi users could be liable for a dry tax charge. This leads some stakeholders to question whether the tax treatment is consistent with the economic substance of the transaction.

An efficient tax system that is perceived as fair and predictable

To achieve this, there must be clarity in law.

Minimising the administrative burden required to comply with tax rules

Complex tax computations may deter individuals from engaging in DeFi, or limit participation to those who can afford professional advice.

Policy options for reform

The government has received representations that the current taxation framework for DeFi is sometimes inconsistent with the principles outlined above. For this reason, the government will use the information received from this call for evidence to decide what action, if any, may be necessary to improve the taxation framework for DeFi lending and staking.

In the past, the UK has introduced specific tax legislation in areas where the application of general taxation principles could give rise to tax outcomes that do not follow the economic reality of the transaction. The repo and stock lending regimes apply to transfers of securities that do not amount to the disposal of all economic rights.[3] These, or similar rules, could address some of the issues that have been highlighted about the application of tax rules for the DeFi market. An overview of the repo and stock lending regimes is presented in Annex A.

Repos are financing transactions that are structured to involve the sale of securities combined with an obligation to repurchase the same or similar securities at a pre-determined price. Because they are structured as a sale, there is a disposal of beneficial ownership. This is similar to the disposal of beneficial ownership that may arise in the staking or lending of cryptoassets. The repo regime, however, prevents a CGT charge by following the underlying economic substance of the transaction and treating the sale and repurchase as if it were a loan.

During the informal engagement prior to this call for evidence, several DeFi stakeholders proposed to include cryptoassets in the repo and/or stock lending rules by defining cryptoassets as ‘securities’ (‘Option 1’). Doing so would exclude from CGT DeFi transactions that meet the specific statutory rules in the Repo and/or Stock Lending legislation. The government is interested to understand if this option is seen as a suitable solution by DeFi market participants and, if not, the perceived deficiencies of such an approach.

The government would like to ascertain if the requirement (for both the Repo and the Stock Lending regimes) that transactions are between ‘persons’ may be problematic for certain DeFi platforms. Views are also sought on whether, considering the evolving nature of the market, this option would successfully simplify the taxation of all or most current and future DeFi models, or whether it would result in barriers to the development of the DeFi market.

A second option (‘Option 2’) for reform involves legislating to create separate rules for DeFi lending and staking activities which follow the principles applicable to repos and stock lending. These rules would remove from the scope of CGT some lending and staking activities. Option 2 will be considered if the evidence gathered shows that Option 1 would have detrimental effects on the development of the DeFi market, would not be sufficient to cover the variety of DeFi models that exist, or would create further issues for participants.

In addition to options 1 and 2, the government is interested to get views from DeFi stakeholders on whether a ‘no gain no loss’ treatment for DeFi loans and staking is seen as a viable approach (‘Option 3’). Under Option 3, the transfer of cryptoassets for lending and staking would be seen as a ‘no gain no loss’ transaction, by treating the disposal value as matching the acquisition cost. A CGT gain or loss would arise under Option 3 when cryptoassets are disposed of in a non-lending or staking transaction.

Summary of options:

• Option 1 - Legislate to bring DeFi lending and staking within the Repo and Stock Lending rules by defining cryptoassets as ‘securities’.
• Option 2 - Legislate to create separate rules for DeFi lending and staking, along the lines of those applicable to repos and stock lending.
• Option 3 - Apply a ‘no loss no gain’ treatment to DeFi loans and staking, deferring the tax liability until the assets are economically disposed of.

In addition, the government would be interested to consider other options for change that are in line with the principles and objectives set out above. Suggestions of further options would therefore be welcome.

Question 2:

Bearing in mind that UK individuals are subject to the same tax treatment for DeFi lending and staking wherever the platforms they use are located, does the current tax treatment make the UK less attractive to platforms as a place to do business? If so, which jurisdictions are favoured and why?

Question 3:

Approximately what proportion of DeFi lending and staking transactions give rise to disposals for tax purposes under the current rules?

Question 4:

Of the transactions giving rise to the disposals, what proportion would fall within the (i) Repo rules and (ii) Stock Lending rules, if cryptoassets were treated as securities?

Question 5:

Do you favour changes to the current rules?

Question 6:

• Do you consider Option 1 to be a suitable model for DeFi lending and staking transactions? What are the pros and cons?
• If appropriate, should the Repo, the Stock Lending or both regimes be expanded to apply to DeFi transactions?

Question 7:

• Do you consider Option 2 to be a suitable option? What are its pros and cons?
• Should the new rules be modelled on the Repo rules or the Stock Lending rules, or would both sets of rules be needed to cater for different contractual arrangements?

Question 8:

Do you consider Option 3 to be a suitable option? What are its pros and cons?

Question 9:

Are there alternative approaches to the taxation of DeFi lending and staking that have been adopted by other jurisdictions that the government could consider? If so, please provide more details and reasons.

Question 10:

Besides the options outlined above, are there any further options for change that the government could consider?

Question 11:

How could the government be confident that any proposed rules would not discriminate in favour of users of DeFi services?

4. Summary of call for evidence questions

Question 1:

HMRC would like more information about the UK DeFi lending and staking sector. Please provide any information you hold that is relevant to the following questions. Where appropriate, please summarise data using appropriate ranges or categories, rather than providing only totals or minima and maxima.

• How many DeFi lending and staking platforms are you aware of that are based in the UK? What is the approximate value of their assets?
• Approximately how many UK-based individuals engage in DeFi lending and staking, and how much do they lend/stake?
• How many non-UK-based individuals are served by UK platforms and what amounts do they invest?
• How frequently do individuals transact, and what is the duration of each lending or staking transaction?
• Approximately what percentage of UK-based individuals engaging in DeFi are serviced wholly or mainly by UK platforms? Where else are the platforms UK individuals use commonly based?

Question 2:

Bearing in mind that UK individuals are subject to the same tax treatment for DeFi lending and staking wherever the platforms they use are located, does the current tax treatment make the UK less attractive to platforms as a place to do business? If so, which jurisdictions are favoured and why?

Question 3:

Approximately what proportion of DeFi lending and staking transactions give rise to disposals for tax purposes under the current rules?

Question 4:

Of the transactions giving rise to the disposals, what proportion would fall within the (i) Repo rules and (ii) Stock Lending rules, if cryptoassets were treated as securities?

Question 5:

Do you favour changes to the current rules?

Question 6:

• Do you consider Option 1 to be a suitable model for DeFi lending and staking transactions? What are the pros and cons?
• If appropriate, should the Repo, the Stock Lending or both regimes be expanded to apply to DeFi transactions?

Question 7:

• Do you consider Option 2 to be a suitable option? What are its pros and cons?
• Should the new rules be modelled on the Repo rules or the Stock Lending rules, or would both sets of rules be needed to cater for different contractual arrangements?

Question 8:

Do you consider Option 3 to be a suitable option? What are its pros and cons?

Question 9:

Are there alternative approaches to the taxation of DeFi lending and staking that have been adopted by other jurisdictions that the government could consider? If so, please provide more details and reasons.

Question 10:

Besides the options outlined above, are there any further options for change that the government could consider?

Question 11:

How could the government be confident that any proposed rules would not discriminate in favour of users of DeFi services?

The call for evidence process

This call for evidence is being conducted in line with the Tax Consultation Framework.

There are 5 stages to tax policy development:

• Stage 1 Setting out objectives and identifying options.
• Stage 2 Determining the best option and developing a framework for implementation including detailed policy design.
• Stage 3 Drafting legislation to effect the proposed change.
• Stage 4 Implementing and monitoring the change.
• Stage 5 Reviewing and evaluating the change.

This call for evidence is taking place during stage 1 of the process. The purpose of the call for evidence is to seek views on the policy design and any suitable possible alternatives, before consulting later on a specific proposal for reform.

How to respond

A summary of the questions in this call for evidence is included at chapter 4.

Responses should be sent by 31 August 2022, by email to [email protected].

Please do not send call for evidence responses to the Call for evidence Co-ordinator.

Paper copies of this document or copies in Welsh and alternative formats (large print, audio and Braille) may be obtained free of charge from the above address. This document can also be accessed from HMRC’s GOV.UK pages. All responses will be acknowledged, but it will not be possible to give substantive replies to individual representations.

When responding please say if you are a business, individual or representative body. In the case of representative bodies please provide information on the number and nature of people you represent.

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Annex A - Repo and Stock Lending as applicable to individuals

Overview of the Repo regime

A repo is a financing arrangement which is structured as a sale and repurchase of securities. The original owner of securities ‘borrows’ cash by selling securities to the other party of the transaction. At the end of the arrangement, the original owner repurchases the securities from the other party. The repurchase price is generally higher than the sale price as it includes the ‘interest’ element of the transaction.

In a repo transaction there is an actual sale of securities, with the beneficial ownership in those securities being disposed of by the original owner. However, economically a repo is not a true sale of securities but is in effect a financing transaction. The tax legislation has therefore been amended to treat repos as loans and not as sales of securities.

This is achieved by disregarding the sale (and subsequent repurchase) from Capital Gains Tax (s263A(1) Taxation of Capital Gains Act 1992) and by taxing as interest the return paid by the other party to the original owner (under Part 4 Chapter 2A Income Tax (Trading and Other Income) Act 2005).

Overview of the Stock Lending regime

Stock Lending enables market makers and other securities dealers to obtain securities to meet deliveries on sales of those securities. This could be the case for example when dealers borrow securities to settle ‘short’ sales (selling securities they do not own) and hope to profit by buying equivalent securities at a lower price to return to the lender when the loan matures.

The transfers under a stock lending agreement are not sales, but, despite their name, they are not loans. Full beneficial and legal ownership is transferred, so that if the borrower wishes it can on-lend the securities or sell them, purchasing replacement securities at a later date to fulfil its obligation to return equivalent securities when the stock loan matures.

The lender, despite transferring the beneficial ownership in the securities, retains all the risks and benefits arising from the movements in the price of the securities. As the lender retains these risks economically, the tax legislation disregards the disposal of securities for Capital Gains Tax (under s263B(2) of the Taxation of Capital Gains Tax Act 1992).

Further, any payments made by the borrower to the lender based on any income generated by the securities while they were lent (such as dividends for shares or interest for debt securities) will be taxed as manufactured payments. In general, the tax legislation ensures that a manufactured payment is taxed on the lender as if the lender had received that payment directly. For example, manufactured dividends received by the lender of shares from the borrower will be taxed on the lender as if the lender had received the dividends directly.

Note that the references to Capital Gains Tax in this Annex do not extend to the taxation of capital gains for companies (which are charged to Corporation Tax).

Relevant (current) legislation

Taxation of Chargeable Gains Act 1992

s263A Agreements for sale and repurchase of securities: Capital Gains Tax

263A(A1) For the purposes of this section there is a repo in respect of securities if–

(a)a person (“the original owner”) has agreed to sell the securities to another person (“the interim holder”), and

(b)the original owner or a person connected with the original owner–

(i)is required to buy back the securities by the agreement or a related agreement,

(ii)is required to buy back the securities as a result of the exercise of an option acquired under the agreement or a related agreement, or

(iii)exercises an option to buy back the securities which was acquired under the agreement or a related agreement.

263A(1) Subject to subsections (3) and (4) below, in any case where under a repo in respect of securities the original owner has transferred the securities to the interim holder–

(a)the acquisition of the securities in question by the interim holder and the disposal of those securities by him to the repurchaser; and

(b)except where the repurchaser is or may be different from the original owner, the disposal of those securities by the original owner and any acquisition of those securities by the original owner as the repurchaser,

shall be disregarded for the purposes of capital gains tax.

263A(1A) If, at any time after the acquisition mentioned in subsection (1)(a) above, it becomes apparent that the interim holder will not dispose of the securities to the repurchaser, the interim holder shall be treated for the purposes of capital gains tax as acquiring them at that time for a consideration equal to their market value at that time.

263A(1B) If, at any time after the disposal mentioned in subsection (1)(b) above, it becomes apparent that the original owner will not acquire the securities as the repurchaser, the original owner shall be treated for the purposes of capital gains tax as disposing of them at that time for a consideration equal to their market value at that time.

263A(2) [Omitted by FA 2007, s. 47(2) and Sch. 14, para. 12(4); repealed by FA 2007, s. 114 and Sch. 27, Pt. 2(14).]

263A(3) Subsection (1) above does not apply if–

(a)the agreement or agreements under which provision is made for the sale and repurchase are not such as would be entered into by persons dealing with each other at arm’s length; or

(b)any of the benefits or risks arising from fluctuations, before the repurchase takes place, in the market value of the securities sold accrues to, or falls on, the interim holder.

263A(4) Subsection (1) above does not apply in relation to any disposal or acquisition of qualifying corporate bonds in a case where the securities disposed of by the original owner or those acquired by him, or by any other person, as the repurchaser are not such bonds.

263A(5) [Omitted by FA 2013, s. 28 and Sch. 12, para. 9(4).]

263A(6) This section does not apply for the purposes of corporation tax in respect of chargeable gains.

263B Stock lending arrangements

263B(1) In this section “stock lending arrangement”  means so much of any arrangements between two persons (“the borrower”  and “the lender” ) as are arrangements under which–

(a)the lender transfers securities to the borrower otherwise than by way of sale; and

(b)a requirement is imposed on the borrower to transfer those securities back to the lender otherwise than by way of sale.

263B(2) Subject to the following provisions of this section and sections 263C(2) and 263CA(3) and (5), the disposals and acquisitions made in pursuance of any stock lending arrangement shall be disregarded for the purposes of capital gains tax.

263B(3) Where–

(a)the borrower under any stock lending arrangement disposes of any securities transferred to him under the arrangement,

(b)that disposal is made otherwise than in the discharge of the requirement for the transfer of securities back to the lender, and

(c)that requirement, so far as it relates to the securities disposed of, has been or will be discharged by the transfer of securities other than those transferred to the borrower,

any question relating to the acquisition of the securities disposed of shall be determined (without prejudice to the provisions of Chapter I of Part IV) as if the securities disposed of were the securities with which that requirement (so far as relating to the securities disposed of) has been or will be discharged.

263B(4) Where, in the case of any stock lending arrangement, it becomes apparent, at any time after the making of the transfer by the lender, that the requirement for the borrower to make a transfer back to the lender will not be complied with–

(a)the lender shall be deemed for the purposes of this Act to have made a disposal at that time of the securities transferred to the borrower for a consideration equal to their market value at that time;

(b)the borrower shall be deemed to have acquired them at that time for that consideration; and

(c)subsection (3) above shall have effect in relation to any disposal before that time by the borrower of securities transferred to him by the lender as if the securities deemed to have been acquired by the borrower in accordance with paragraph (b) above were to be used for discharging a requirement to transfer securities back to the lender.

This subsection does not apply where section 263CA (insolvency of borrower) applies.

263B(5) References in this section, in relation to a person to whom securities are transferred, to the transfer of those securities back to another person shall be construed as if the cases where those securities are taken to be transferred back to that other person included any case where securities of the same description as those securities are transferred to that other person either–

(a)in accordance with a requirement to transfer securities of the same description; or

(b)in exercise of a power to substitute securities of the same description for the securities that are required to be transferred back.

263B(6) For the purposes of this section securities shall not be taken to be of the same description as other securities unless they are in the same quantities, give the same rights against the same persons and are of the same type and nominal value as the other securities.

263B(7) In this section “securities” has the meaning given by section 263AA.

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[1] Any reference to CGT in this document includes the tax treatment of capital gains charged to Corporation Tax unless indicated otherwise.

[2] The return received by a lender may be referred to as ‘interest’ by either party. HMRC does not, however, consider the return received by the lender to be interest for tax purposes. This is because interest can only arise, according to case law principles, if the principal of the loan consists of fiat currency.

[3] Individuals: s263 A and B Taxation of Capital Gains Act 1992; Companies: Part 6 Chapter 10 Corporation Tax Act 2009

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