Finance (No. 2) Bill (HC Bill 155)

Average holding period: disposals

809FZD Disposals

(1) An investment or part of an investment is disposed of where—

(a) there is a disposal of the investment or the part of the
5investment for the purposes of the investment scheme,

(b) there is a disposal for the purposes of the investment scheme of
an intermediate holding or intermediate holding structure
(including an intermediate investment scheme) by or through
which the investment is held, or

(c) 10in any other case, there is a deemed disposal under subsection
(2).

(2)
There is a deemed disposal of an investment or part of an investment
under this subsection where—

(a) under any arrangements—

(i) 15the scheme in substance closes its position on the
investment or the part of the investment, or

(ii) the scheme ceases to be exposed to risks and rewards in
the respect of the investment or the part of the
investment, and

(b) 20it is reasonable to suppose that the arrangements were designed
to secure that result.

(3) In the case of a disposal of part of a holding of securities in a company
which are of the same class, suppose for the purposes of determining
which investments have been disposed of that the disposal affects the
25securities in the order in which they were acquired (that is, on a first in
first out basis).

(4) The references in subsection (1)(a) and (b) to a disposal are to
something which is a disposal for the purposes of TCGA 1992; but for
the purposes of subsection (1)(a) disregard section 116 of TCGA 1992
30(which disapplies sections 127 to 130 of that Act in relation to qualifying
corporate bonds).

809FZE Part disposals

(1) Where there is a disposal of part of an investment, the part disposed of
and the part not disposed of are to be treated as two separate
35investments which were made at the same time.

(2) The value of each of those two separate investments is the appropriate
proportion of the value first invested in the whole investment.

(3) The appropriate proportion is the proportion of the value of the part in
question to the value of the whole investment at the time of the
40disposal.

(4) The disposal of part of an asset includes the disposal of an interest in or
right over the asset (and “part disposed of” is to be construed
accordingly).

809FZF Unwanted short-term investments

(1) 45The making and disposal of an investment for the purposes of an
investment scheme are to be disregarded if—

(a) the investment is an unwanted short-term investment, and

(b) the unwanted short-term investment is excludable.

(2) An investment is an unwanted short-term investment where—

(a) the investment is made as part of a transaction under which one
5or more other investments are made for the purposes of the
scheme,

(b) the value of the investment does not exceed that of the other
investments taken together,

(c) it is reasonable to suppose that the investment had to be made
10in order for the other investments to be made,

(d) at the time the investment is made, managers of the scheme
have a firm, settled and evidenced intention to dispose of the
investment for the purposes of the scheme within the relevant
period,

(e) 15the investment is disposed of for the purposes of the scheme
within the relevant period, and

(f) any profit resulting from the disposal has no bearing on
whether a sum of carried interest arises or on the amount of any
sum of carried interest which does arise.

(3) 20An unwanted short-term investment is excludable if it constitutes—

(a) an investment in land,

(b) an investment in securities in an unlisted company,

(c) the making of a direct loan where the other investments
specified in subsection (2)(b) are shares or other securities in an
25unlisted company, or

(d) the making of a direct loan which is a qualifying loan within the
meaning given by section 809FZR(2).

(4) In subsection (2)(e) “relevant period” means—

(a) for an investment within subsection (3)(a), 12 months;

(b) 30for an investment within subsection (3)(b) or (c), 6 months;

(c) for an investment within subsection (3)(d), 120 days.

(5) But if at any time it becomes reasonable to suppose that, when the
scheme ceases to invest, 25% or more of the capital of the investment
scheme will have been invested in unwanted short-term investments
35which are excludable, subsection (1) does not apply to any investment
made subsequently for the purposes of the scheme.

Average holding period: derivatives and hedging

809FZG Derivatives

(1) A derivative contract entered into for the purposes of an investment
40scheme is an investment, subject to the following provisions of this
section.

(2) The value invested in the derivative contract is—

(a) where the contract is an option, the cost of acquiring the option
(whether from the grantor or another person),

(b) 45where the contract is a future, the price specified in the contract
for the underlying subject matter, or

(c) where the contract is a contract for differences, the notional
principal of the contract.

(3) But where entering into a derivative contract constitutes a deemed
disposal of an investment or part of an investment by virtue of section
5809FZD(2)(a)(ii)—

(a) the derivative contract is not an investment, and

(b) the subsequent disposal of the derivative contract without a
corresponding disposal of the investment or part investment is
to be regarded as the making of a new investment to the extent
10that the scheme becomes materially exposed to risks and
rewards in respect of the investment or part investment.

(4) For the purposes of this Chapter, references to disposal, in the case of a
derivative contract, include any of the following events (to the extent
that the event is not otherwise a disposal under section 809FZD(1) or
15(2))—

(a) the expiry of the contract,

(b) the termination of the contract (whether or not in accordance
with its terms),

(c) the disposal, substantial variation, loss or cancellation of the
20investment scheme’s rights under the contract, and

(d) in the case of a derivative contract which is an option, the
exercise of the option,

but do not include the renewal of the contract with the same
counterparty on substantially the same terms.

(5) 25The substantial variation of an investment scheme’s rights under a
derivative contract constitutes (in addition to the disposal of the
contract as originally entered into (see subsection (4)(c)) a new
investment consisting of the contract as varied.

809FZH Hedging: exchange gains and losses

(1) 30This section applies where—

(a) an investment scheme has a hedging relationship between a
relevant instrument and a relevant investment, and

(b) the hedging relationship relates to exchange gains or losses.

(2) In this section—

• 35“relevant instrument” means a derivative contract or a liability
  representing a loan relationship, and

• “relevant investment” means—

  (a)

  where the relevant instrument is a derivative contract,
  an investment made for the purposes of the scheme or a
  40liability representing a loan relationship;

  (b)

  where the relevant instrument is a liability representing
  a loan relationship, an investment made for the
  purposes of the scheme.

(3) An investment scheme has a hedging relationship between a relevant
45instrument and a relevant investment if or to the extent that—

(a) the instrument and the investment are designated by the
scheme as a hedge, or

(b) in any other case, the instrument is intended to act as a hedge of
exposure to—

(i) changes in fair value of the investment or an identified
portion of the investment, or

(ii) 5variability in cash flows,

where the exposure is attributable to exchange gains or losses
and could affect profit or loss of the investment scheme.

(4) Entering into the hedging relationship is not a deemed disposal of the
relevant investment under section 809FZD(2).

(5) 10The relevant instrument is not an investment for the purposes of the
investment scheme to the extent that the conditions in subsection (3)(a)
and (b) are met.

(6) But the termination of the hedging relationship is the making of an
investment constituting the relevant instrument if or to the extent that
15that instrument continues to subsist.

809FZI Hedging: interest rates

(1) This section applies where an investment scheme has a hedging
relationship between—

(a) an interest rate contract, and

(b) 20a qualifying investment held for the purposes of the fund.

(2) An investment scheme has a hedging relationship between an interest
rate contract and a qualifying investment if or to the extent that—

(a) the interest rate contract and the investment are designated by
the scheme as a hedge, or

(b) 25in any other case, the interest rate contract is intended to act as
a hedge of exposure to—

(i) changes in fair value of the investment or an identified
portion of the investment, or

(ii) variability in cash flows,

30where the exposure is attributable to interest rates and could
affect profit or loss of the investment scheme.

(3) Entering into the hedging relationship is not a deemed disposal of the
relevant investment under section 809FZD(2).

(4) The interest rate contract is not an investment for the purposes of the
35investment scheme to the extent that the conditions in subsection (2)(a)
and (b) are met.

(5) But the termination of the hedging relationship is the making of an
investment constituting the interest rate contract if or to the extent that
the interest rate contract continues to subsist.

(6) 40In this section “qualifying investment” means—

(a) money placed at interest,

(b) securities (excluding shares issued by companies),

(c) alternative finance arrangements, and

(d) a liability representing a loan relationship.

Average holding period: aggregation of acquisitions and disposals

809FZJ Significant interests

(1) Where an investment scheme has a controlling interest in a trading
company or the holding company of a trading group—

(a) 5any investment made for the purposes of the scheme in that
company after the time when the controlling interest was
acquired is to be regarded as having been made at that time, and

(b) any disposal for the purposes of the scheme of an investment in
the company after the time the controlling interest was acquired
10is to be regarded as not being made until a relevant disposal is
made.

(2) In subsection (1)(b) “relevant disposal”, in relation to a company,
means a disposal which (apart from subsection (1)) has the effect that
the investment scheme ceases to have a 40% interest in the company.

(3) 15For the purposes of this section, in determining whether an investment
scheme has a controlling interest or a 40% interest in a company, any
share capital of the company which is held for the purposes of an
associated investment scheme is to be regarded as held for the purposes
of the investment scheme.

809FZK 20 Venture capital funds

(1) Where a venture capital fund has a relevant interest in a trading
company or the holding company of a trading group—

(a) any venture capital investment made for the purposes of the
scheme in the company after the time the relevant interest was
25acquired (and before a relevant disposal) is to be regarded as
having been made at the time the relevant interest was
acquired, and

(b) any disposal for the purposes of the scheme of a venture capital
investment in the company after that time is to be regarded as
30not being made until—

(i) a relevant disposal is made, or

(ii) the scheme director condition ceases to be met.

(2) For the purposes of subsection (1) a venture capital fund has a relevant
interest in a company if —

(a) 35by virtue of its venture capital investments the fund has at least
a 5% interest in the company, or

(b) venture capital investments held for the purposes of the scheme
in the company have a value of more than £1 million.

(3) For the purposes of subsection (1) “relevant disposal” means a disposal
40which (apart from subsection (1)) has the effect that the venture capital
fund has disposed of more than 80% of the greatest amount invested at
any one time in the company for the purposes of the fund.

(4) In this Chapter, “venture capital fund” means an investment scheme in
relation to which the condition in subsection (5) is met.

(5) 45The condition is that when the scheme starts to invest it is reasonable to
suppose that over the investing life of the scheme—

(a) at least two-thirds of the total value invested for the purposes of
the scheme will be invested in venture capital investments, and

(b) at least two-thirds of the total value invested for the purposes of
the scheme will be invested in investments which are held for
540 months or more.

(6) In determining whether subsection (5)(b) is met in relation to an
investment scheme, apply the rule in subsection (1) to the scheme.

(7) In this section, “venture capital investment”, in relation to an
investment scheme, means an investment in a trading company or the
10holding company of a trading group where—

(a) at the time the investment is made the company is unlisted and
is likely to remain so,

(b) at least 75%of the total value of the investment is invested in—

(i) newly issued shares or

(ii) 15newly issued securities convertible into shares,

(c) the investment is used in a trade carried on by the trading
company or the trading group—

(i) to support its growth, or

(ii) for the development of new products or services,

20and is not used directly or indirectly to acquire shares in the
company which are not newly issued,

(d) if the investment is the first investment made in the company
for the purposes of the scheme, the trading company or group
has not carried on that trade for more than 7 years, and

(e) 25the scheme director condition is met.

(8) In this Chapter, the scheme director condition, in relation to an
investment scheme and a company, is that—

(a) the scheme (or the scheme and one or more investment schemes
acting together) are entitled to appoint a director (“the scheme
30director”) of—

(i) the company, or

(ii) a company which controls the company, and

(b) the scheme director is entitled to exercise rights within
subsection (9).

(9) 35Those rights are rights which—

(a) are rights conferred under contractual arrangements—

(i) to which some or all of the investors in the company are
parties, and

(ii) which it would be reasonable to suppose would not
40otherwise be capable of being exercised by the scheme
director,

(b) relate to the conduct of the business and affairs of the company,
and

(c) are at least equivalent to the rights which it is reasonable to
45suppose a prudent investor would have obtained on making an
investment in the company at arm’s length of the same size and
nature as that held in the company for the purposes of the
investment scheme.

(10) In determining whether the condition in subsection (2)(a) or (b) is met
in relation to a venture capital fund, any share capital of a company
which is held for the purposes of an associated investment scheme is to
be regarded as held for the purposes of the venture capital fund.

809FZL 5 Significant equity stake funds

(1) Where a significant equity stake fund has a significant equity stake
investment in a trading company or the holding company of a trading
group—

(a) any investment made for the purposes of the fund in that
10company made after the time the significant equity stake
investment was acquired is to be regarded as having been made
at that time, and

(b) any disposal for the purposes of the fund of an investment in
the company after that time is to be regarded as not being made
15until—

(i) a relevant disposal is made, or

(ii) the scheme director condition ceases to be met.

(2) In subsection (1)(b) “relevant disposal” means a disposal which (apart
from subsection (1)) has the effect that the significant equity stake fund
20ceases to have a 15% interest in the company.

(3) In this Chapter, “significant equity stake fund” means an investment
scheme—

(a) which is not a venture capital fund, and

(b) in relation to which the condition in subsection (4) is met.

(4) 25The condition is that when the scheme starts to invest it is reasonable to
suppose that over the investing life of the scheme—

(a) more than 50% of the total value invested for the purposes of the
scheme will be invested in investments which are significant
equity stake investments, and

(b) 30more than 50% of that value will be invested in investments
which are held for 40 months or more.

(5) In determining whether subsection (4)(b) is met in relation to an
investment scheme, apply the rule in subsection (1) to the scheme.

(6) In this section, “significant equity stake investment”, in relation to an
35investment scheme, means an investment in a trading company or the
holding company of a trading group where—

(a) at the time the investment is made, the company is unlisted and
likely to remain so,

(b) by virtue of the investment (on its own or with other
40investments) the scheme has a 20% interest in the company, and

(c) the scheme director condition is met.

(7) For the purposes of this section, in determining whether a significant
equity stake fund has an interest of a particular percentage in a
company, any share capital of the company which is held for the
45purposes of an associated investment scheme is to be regarded as held
for the purposes of the significant equity stake fund.

809FZM Controlling equity stake funds

(1) Where a controlling equity stake fund has a 25% interest in a trading
company or the holding company of a trading group—

(a) any investment made for the purposes of the controlling equity
5stake fund in the company after the time the 25% interest was
acquired is to be regarded as having been made at that time, and

(b) any disposal for the purposes of the controlling equity stake
fund of an investment in the company after that time is to be
regarded as not being made until a relevant disposal is made.

(2) 10In subsection (1)(b), “relevant disposal”, in relation to a company,
means a disposal which (apart from subsection (1)) has the effect that
the controlling equity stake fund ceases to have a 25% interest in the
company.

(3) In this Chapter, “controlling equity stake fund” means an investment
15scheme—

(a) which is not a venture capital fund or significant equity stake
fund, and

(b) in relation to which the condition in subsection (4) is met.

(4) The condition is that when the scheme starts to invest it is reasonable to
20suppose that, over the investing life of the scheme—

(a) more than 50% of the total value invested for the purposes of the
scheme will be invested in investments which are controlling
interests in trading companies or holding companies of trading
groups, and

(b) 25more than 50% of the total value invested for the purposes of the
scheme will be invested in investments which are held for 40
months or more.

(5) In determining whether subsection (4)(b) is met in relation to an
investment scheme, apply the rule in subsection (1) to the scheme.

(6) 30For the purposes of this section, in determining whether a controlling
equity stake fund has a controlling interest or an interest of a particular
percentage in a company, any share capital of the company which is
held for the purposes of an associated investment scheme is to be
regarded as held for the purposes of the controlling equity stake fund.

809FZN 35 Real estate funds

(1) Where a real estate fund has a major interest in any land—

(a) any investment made for the purposes of the fund in that land
after the time the major interest was acquired is to be regarded
as having been made at that time, and

(b) 40any disposal for the purposes of the fund of an investment in
the land after that time is to be regarded as not being made until
a relevant disposal is made.

(2) In subsection (1)(b) “relevant disposal” means a disposal which (apart
from subsection (1)) has the effect that the real estate fund has disposed
45of more than 50% of the greatest value invested at any one time in the
land for the purposes of the real estate fund.

(3) Where a real estate fund has a major interest in any land (“the original
land”) and subsequently acquires a major interest in any adjacent
land—

(a) the acquisition is an investment in the original land for the
5purposes of subsection (1)(a), and

(b) after the acquisition, the adjacent land is to be regarded as part
of the original land for the purposes of subsections (1) and (2).

(4) In this Chapter, “real estate fund” means an investment scheme—

(a) which is not a venture capital fund, significant equity stake
10fund or controlling equity stake fund, and

(b) in relation to which the condition in subsection (5) is met.

(5) The condition is that when the scheme starts to invest it is reasonable to
suppose that over the investing life of the scheme—

(a) more than 50% of the total value invested for the purposes of the
15scheme will be invested in land, and

(b) more than 50% of the total value invested for the purposes of the
scheme will be invested in investments which are held for 40
months or more.

(6) In determining whether subsection (5)(b) is met in relation to an
20investment scheme, apply the rule in subsection (1) to the scheme.

809FZO Funds of funds

(1) Section 809FZC(5) (disregard of intermediate holdings and holding
structures) does not apply to an investment made for the purposes of a
fund of funds in a collective investment scheme (and, accordingly, such
25an investment is regarded as an investment in the collective investment
scheme itself).

(2) Subsection (1) does not apply in relation to a fund of funds in relation
to a collective investment scheme if it is reasonable to suppose that the
main purpose or one of the main purposes of the making of any
30investment in any collective investment scheme for the purposes of the
fund of funds is to reduce the proportion of carried interest arising to
any person which is income-based carried interest.

(3) Where by virtue of subsection (1) a fund of funds has a significant
investment in a collective investment scheme (“the underlying
35scheme”)—

(a) any qualifying investment made for the purposes of the fund in
the underlying scheme after the time the significant investment
was acquired is to be regarded as having been made at that
time, and

(b) 40any disposal for the purposes of the fund of a qualifying
investment in the company after that time is to be regarded as
not being made until a relevant disposal is made.

(4) In subsection (3)(b) “relevant disposal”, in relation to a company,
means a disposal which (apart from subsection (3)) has the effect that—

(a) 45the fund of funds has (by virtue of disposals of its interest in the
underlying scheme) disposed of at least 50% of the greatest
value invested for its purposes at any one time in the
underlying scheme, or

(b) the fund of fund’s investment in the underlying scheme is
worth less than whichever is the greater of—

(i) £1 million, or

(ii) 5% of the total value of the investments made before the
5disposal for the purposes of the fund of funds in the
underlying scheme.

(5) In this Chapter, “fund of funds” means an investment scheme in
relation to which the condition in subsection (6) is met.

(6) The condition is that when the scheme starts to invest it is reasonable to
10suppose that over the investing life of the scheme—

(a) substantially all of the total value invested for the purposes of
the scheme will be invested in collective investment schemes of
which the scheme holds less than 50% by value,

(b) more than 50% of the total value invested for the purposes of the
15scheme will be invested in investments which are held for 40
months or more, and

(c) more than 75% of the total value invested in the scheme will be
invested by external investors.

(7) In determining whether subsection (6)(b) is met in relation to an
20investment scheme, apply the rule in subsection (3) to the scheme.

(8) In this section, “significant investment”, in relation to a collective
investment scheme, means—

(a) an investment of a least £1 million in the scheme, or

(b) an investment of at least 5% of the total amounts raised or to be
25raised from external investors in the scheme.

(9) In this section, “qualifying investment” means an investment made for
the purposes of an investment scheme in a collective investment
scheme (“the underlying scheme”) where—

(a) the investment is held on the same terms as other investments
30made by external investors in the underlying scheme,

(b) the fund of funds, together with any connected funds, does not
hold more than 30% by value of the underlying scheme,

(c) the underlying scheme has not made an investment in the fund
of funds,

(d) 35no person providing investment management services to the
underlying scheme provides investment management services
to the fund of funds, and

(e) it is reasonable to suppose that the investment in the underlying
scheme is not part of arrangements the main purpose or one of
40the main purposes of which is to reward any person involved in
providing investment management services to the underlying
scheme or a scheme connected with that underlying scheme.

809FZP Secondary funds

(1) Section 809FZC(5) (disregard of intermediate holdings and holding
45structures) does not apply to investments acquired for the purposes of
a secondary fund in a collective investment scheme (and, accordingly,
such an investment is regarded as an investment in the collective
investment scheme itself).