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Tax treatment of alternative finance investment bonds

Where sukuk meet the conditions in CTA09/S507 to be alternative finance investment bonds, additional payments made or received under the bonds are alternative finance return. This is subject to the provisions about discount - see CFM44180.

For corporation tax purposes, CTA09/S510(5) treats alternative finance investment bonds as loan relationships (see CFM44040).

For income tax purposes, ITA07/S564M applies to alternative finance return received or paid on such bonds. There are further statutory provisions for alternative finance investment bonds, which are relevant only to non-corporate holders. These are summarised at CFM44300.

Where an alternative finance investment bond is treated as a loan relationship, CTA09/S464 ensures that profits or losses from the bond cannot be taxed or relieved in any other way. But because many, if not most, sukuk arrangements

• involve the creation of a trust, and
• fall to be treated as collective investment schemes under Financial ÌìÃÀÓ°Ôº and Markets Act 2000,

the legislation provides that tax provisions relevant to trusts or to collective investment schemes do not apply.

Specifically, CTA09/S519(4) ensures that alternative finance investment bonds are not treated as a unit trust scheme either for the purposes of CTA09/PT10/CH5 or ITA07/S1007 (dealing with the taxation of unauthorised unit trusts) or for capital gains purposes; not treated as an offshore fund; and, for a company, are not a ‘relevant holding’ in a unit trust or offshore fund for loan relationships purposes.

CFM44240 explains the tax treatment of ‘bond assets’ held by a company issuing alternative finance investment bond.