Bonds with euro clause are qualifying corporate bonds, says Court of Appeal

"With the UK intending to leave the EU, new loan notes are very unlikely to be issued containing provisions which would apply if we joined the euro. The decision will only be relevant therefore to loan notes issued in the past," said Catherine Robins, a tax expert at Pinsent Masons, the law firm behind Out-law.com.

The case concerned the tax treatment of bonds which Mr Trigg and certain other individuals had bought on the secondary market and then disposed of at a gain. The individuals had treated the gains as exempt from CGT in their tax returns, on the basis that the bonds were QCBs. A gain which arises on a QCB is not subject to CGT.

The bonds were denominated in sterling but contained provisions which would apply if the UK joined the euro. The bonds contained one of two types of clauses. The first type of clause provided that if there was a change in the lawful currency of the UK references in, and obligations under the bonds expressed in sterling would be converted into the new currency of the UK at the official rate of exchange recognised for that purpose by the Bank of England.

The other type of clause applied if the UK adopted the euro and provided for the bonds to be re-designated in euros at a conversion rate established by the Council of the European Union on a date designated by the note issuer.

Bonds which are denominated in sterling but contain provision for redemption in a different currency are usually not QCBs, which means that gains arising on them would be subject to CGT.

The legislation provides that "where provision is made for conversion into, or redemption in, a currency other than sterling" bonds denominated in sterling will not be treated as QCBs.  However, "a provision for redemption in a currency other than sterling, but at the rate of exchange prevailing at redemption" is ignored.

The Court rejected arguments that "sterling" could be interpreted in the legislation as meaning sterling or whatever replaces it as the lawful currency of the UK. Lord Justice Patten said giving sterling a narrower meaning was consistent with the purpose of the QCB exemption, which was to boost the British bond market and was not intended to cover previously issued euro denominated bonds even if the UK joined the euro.

The judge said that "currency other than sterling" must bear the same meaning wherever it appears in section 117 Taxation of Chargeable Gains Act 1992, the statutory provision in question. He said that as sterling means sterling, and not whatever happens to be the national unit of currency from time to time then the euro is a currency other than sterling even if it comes to replace sterling as part of monetary union.  The judge than went on to consider whether the clauses should be treated as the kind of "provision" for conversion into a different currency which section 117(1)(b) was intended to refer to.

He said that nothing required section 117 to be given any kind of special or qualified meaning. On this basis the question to be decided was whether the two clauses in the bonds were capable of operating as provisions for the conversion of the bonds into a currency other than sterling having regard to the way in which the relevant EU directives would operate in the event of the UK adopting the euro as its national currency.

The judge agreed with the taxpayers that since the clauses would only apply once there had been a change from sterling to the euro, they were not conversion provisions within section 117 and so the judge said the bonds were QCBs notwithstanding the euro provisions.

"The decision will not affect the kind of wording typically used to make QCBs into non-QCBs where loan notes are issued to selling shareholders. This wording usually provides an option for the loan notes to be redeemed in a currency such as US dollars," Catherine Robins said.