The name is Bond, QC Bond (or non-QC Bond)

The name is Bond, QC Bond (or non-QC Bond)

Everyone loves a good acronym. GIF** is one that internet bloggers and the social media savvy will know all about!  But how many of our readers have heard of a QC bond or a “QCB” and know what it means?  A few entrepreneur owner/managers who have been involved in management buy-outs (MBOs) perhaps?  Happily, we in the Stevens & Bolton, Finance, Tax and Corporate M&A teams are very familiar with this particular acronym.  In this article we explain what a QCB is (and, relatedly, what a non-QCB is), why in broad terms loan notes can be structured one way or the other and summarise a recent helpful case for taxpayers who may be holding QCBs standing at a gain.


What is a QCB & a non-QCB?

QCB stands for “qualifying corporate bond”.  A QCB is a security for an underlying debt which has at all times represented a “normal commercial loan”, that has been expressed in sterling and does not contain a provision for its conversion into, or redemption in, any other currency.  A normal commercial loan is one that carries a reasonable interest rate and does not contain “equity-like features” (e.g. conversion into shares). 

A non-QCB is, unsurprisingly, a debt security that does not meet these criteria. The most common method to structure notes as non-QCBs is to add an appropriately drafted foreign currency conversion clause, which is regarded as acceptable tax planning that is not picked up by the Disclosure of Tax Avoidance Schemes rules.

When are notes structured one way or the other?

The distinction between a QCB and non-QCB is important given that QCBs are capital gains tax (CGT) exempt assets (losses on them not allowable) whereas non-QCBs are not. Whether a note is structured one way or the other will depend on circumstances and what a taxpayer has been seeking to achieve in any given case.

A broad summary of how the distinction operates in practice, which can be relevant to an individual vendor who  “swaps” shares on a trade sale or MBO transaction, is that if the vendor receives:

  • loan notes structured as QCBs: the gain arising on the shares disposed of is effectively “frozen” into the QCB loan note at the time of the swap and comes back into charge when the QCB is disposed of. That charge arises regardless of whether the QCB is disposed of on sale, by early redemption, because the loan reaches its maturity date or a debtor company goes under. The loan noteholder therefore risks the gain coming back into charge regardless of whether or not they receive anything back on their QCB loan notes.
  • loan notes structured as non-QCBs: those notes more or less continue to represent the shares disposed of as far as tax is concerned, with a liability to tax on the non-QCB note ultimately dependent upon the value received by the vendor at the point of disposal, early redemption or maturity.

This is of course a simplification and there are many other factors at play and reasons why structuring a note one way over another may be helpful to a taxpayer in a given situation. For instance, even if QCB notes received on sale can be guaranteed or secured, or a vendor is otherwise confident that the issuing company will be able to meet its obligations under the notes, they may prefer to receive loan notes structured as non-QCBs which are capable of conversion into shares in a newco buyer in order to enjoy any “equity upside”.

The important point is that it is the drafting of the notes that determines the tax outcome, as the decision of the Court of Appeal in the recent tax case N Trigg v HMRC [2018] EWCA 17 Civ has emphasised.

The Trigg case

Mr Trigg was a partner in an investment partnership which purchased sterling denominated bonds in the secondary market at less than par with a view to selling them on at a gain. That was what happened and no gain was reported by Mr Trigg to HMRC on disposal of the notes on the basis that they were CGT-exempt QCBs. The bonds contained a customary clause which allowed for their redenomination to EUR if  EUR became the new lawful currency of the UK, which had been a perceived risk at one point in time. HMRC argued that this clause meant that:

  • the bonds contained a provision for “conversion into, or redemption in, a currency other than sterling”;
  • as such, the bonds failed to meet the QCB criteria; and
  • as a result, the bonds were not CGT-exempt assets (with CGT due on the gain).

HMRC won in the Upper Tax Tribunal (UTT) but the Court of Appeal came down on the side of the taxpayer, reversing the UTT decision, which in turn had reversed the decision of the First-tier Tax Tribunal.  The Court of Appeal held that the redenomination clause was not a “provision for conversion … into a currency other than sterling” for UK CGT legislation purposes. The headline reasoning was that if the UK adopted the euro as its lawful currency, then the bonds would have been redenominated into euro automatically under the relevant European legislation at an agreed exchange rate.  As such, the clause would have had no practical effect because, in those circumstances, the bonds would be automatically redenominated under EU law rather than converting or redeeming into another currency in accordance with the euro redenomination provision.  This left the bonds as QCBs and no CGT was due on the gain arising on their disposal.


Andrew Dodds, Managing Associate in the Stevens & Bolton Banking & Finance team, comments:

“The Trigg decision will be welcomed by taxpayers holding QCB loan notes standing at a gain which contain similar redenomination wording. The drafting in question is common in various debt finance products (e.g. bonds, notes and loans) and it would be an undesirable result from a taxpayer's perspective for “boilerplate” language such as this to give rise to an unexpected tax charge. This all assumes that HMRC does not appeal the decision!  

In addition, the Trigg case does not in our view undermine the effectiveness of common currency conversion/election wording which is designed to render a bond a non-QCB by giving the holders the option to redeem sterling denominated bonds in euro or, more usually, US dollars.”


The information in this alert is provided for the purposes of information only and is not a substitute for appropriate professional advice which should be sought based on the facts of any particular case.


** Graphics Interchange Format

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Andrew Dodds

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