What is the purpose of section 263E of the Taxation of Chargeable Gains Act 1992?

Section 263E ensures that when assets are transferred as security under structured finance arrangements, the disposal is disregarded for capital gains tax purposes. This reflects the economic reality that the borrower retains the risks and rewards of ownership, so no chargeable gain or allowable loss arises on the transfer.

What conditions must be met for a disposal to be disregarded under section 263E?

One of two conditions must be satisfied. Condition A requires that the original disposer alone has the right or obligation to reacquire the same asset. Condition B applies where the asset will cease to exist, and the lender or a connected person is intended to hold it until that time. Either condition suffices for the disposal to be disregarded.

What happens if the borrower does not reacquire the asset under a structured finance arrangement?

If it becomes apparent the borrower will not reacquire the asset or it will not be held as intended, the original disposal is brought back into charge. The disposer is treated as having disposed of the asset at market value at the point the failure becomes apparent, potentially giving rise to a chargeable gain.

How does section 263E treat the subsequent reacquisition of the asset?

Where the initial disposal was properly disregarded under section 263E, any subsequent reacquisition of the same asset by the original disposer is also disregarded for CGT. The borrower is treated as having held the asset throughout, retaining the original base cost, unless the market value charge has been triggered.

Taxation of Chargeable Gains Act 1992 section 263E

Structured finance arrangements

Section 263E ensures that when assets are transferred as security under structured finance arrangements, the disposal is generally ignored for capital gains tax purposes, since the borrower retains the economic risks and benefits of ownership.

Where a borrower (or connected person) disposes of an asset as security under a structured finance arrangement, that disposal is disregarded for CGT provided either the borrower has a right or obligation to reacquire the same asset, or the asset will cease to exist and is intended to be held by the lender until that time.
If it later becomes apparent that the borrower will not reacquire the asset, or the asset will not be held by the lender as intended, the disposal is brought back into charge at the market value of the asset at that point.
Where the initial disposal was properly disregarded, any subsequent reacquisition of the same asset by the original disposer is also disregarded for CGT, unless the market value charge has been triggered.
References to persons connected with the borrower exclude the lender, and references to persons connected with the lender exclude the borrower.

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