Finance Bill (HC Bill 47)

(2) “Loan” means a loan of money which—

(a) is made on genuine commercial terms, and

(b) is not part of a scheme or arrangement the main purpose or one
of the main purposes of which is to obtain a tax advantage
5(within the meaning given by section 208 of the FA 2013).

(3) A loan is a “peer-to-peer loan” only if it meets—

(a) Condition A or B, and

(b) Condition C.

(4) Condition A is that the person who made the loan is—

(a) 10an individual,

(b) a partnership which consists of—

(i) two or three persons, and

(ii) at least one person who is not a body corporate, or

(c) an unincorporated body of persons which—

(i) 15is not a partnership, and

(ii) consists of at least one person who is not a body
corporate.

(5) Condition B is that—

(a) the recipient of the loan is a person within paragraph (a), (b) or
20(c) of subsection (4), and

(b) the loan is a personal or small loan.

(6) Condition C is that, assuming interest were paid on the loan, the person
who made the loan would (except for this Chapter) be liable for income
tax charged on the interest.

(7) 25“Personal loan” means a loan which is not used wholly or
predominantly for the purposes of a business carried on, or intended to
be carried on, by the recipient of the loan.

(8) “Small loan” means a loan of £25,000 or less.

412J Meaning of “operator” and related terms

(1) 30This section applies for the purposes of this Chapter.

(2) “Operator” means a person who—

(a) has permission under Part 4A of FISMA 2000 to carry on a
regulated activity specified in Article 36H of the Financial
Services and Markets Act 2000 (Regulated Activities) Order
352001 (S.I. 2001/544S.I. 2001/544) (operating an electronic system in relation
to lending), or

(b) has been granted equivalent permission under the law of a
territory outside the United Kingdom that is within the
European Economic Area.

(3) 40A loan is “made through” an operator if the person who makes the loan
and the recipient of the loan enter the agreement under which the loan
is made at the invitation of the operator.

(4) A right is “assigned through” an operator if the person who assigns the
right and the person to whom the right is assigned enter the agreement

under which the assignment takes effect at the invitation of the
operator.

(5) A person is not to be treated as having entered an agreement at the
invitation of an operator if the operator made the invitation otherwise
5than in the course of carrying on the activity to which the permission
mentioned in subsection (2)(a) or (b) relates.””

(3) In section 24(1) (list of reliefs deductible at Step 2 of the calculation of income
tax liability), in paragraph (b), at the appropriate place insert—

• ““Chapter 1A of Part 8 (irrecoverable peer-to-peer loans),”.”

(4) 10In section 25(3) (list of provisions requiring reliefs to be deducted from
particular components of income etc) at the appropriate place insert—

• ““sections 412A(4), 412B(3) and 412C(3) (relief for irrecoverable
  peer-to-peer loans only against interest on certain loans),”.”

Transactions in securities

33 15Transactions in securities: company distributions

(1) Chapter 1 of Part 13 of ITA 2007 (transactions in securities) is amended as
follows.

(2) In section 684 (person liable to counteraction), in subsection (1)—

(a) in the opening words, after “a person” insert “(“the party”)”;

(b) 20in paragraph (c), omit “the person in being a party to”;

(c) in paragraph (d), for “the person” substitute “the party or any other
person”.

(3) In that section, in subsection (2)—

(a) in paragraph (c), omit the final “and”;

(b) 25after paragraph (d) insert—

“(e) a repayment of share capital or share premium, and

(f) a distribution in respect of securities in a winding up.””

(4) In section 685 (receipt of consideration in connection with distribution by or
assets of close company)—

(a) 30in subsection (2)—

(i) in the opening words, for “the person” substitute “a relevant
person”;

(ii) in the words after paragraph (c), after “and” insert “the relevant
person”;

(b)
35in subsection (3)—

(i) in paragraph (a), for “the person” substitute “a relevant person”;

(ii) in paragraph (c), for “the person” substitute “the relevant
person”;

(c) after subsection (3) insert—

“(3A) 40In subsections (2) and (3) “relevant person” means—

(a) the party, or

(b) any person other than the party in relation to whom the
condition in section 684(1)(d) is met.””

(d) omit subsection (6);

(e) after subsection (7) insert—

“(7A) The references in subsection (4)(a)(i) and (ii) to assets do not
include assets shown to represent return of sums paid by
subscribers on the issue of securities merely because the law of
5the country in which the company is incorporated allows assets
of that description to be available for distribution by way of
dividend.

(7B) The references in subsections (4)(a)(i) and (5)(a) to assets which
are available for distribution by way of dividend by the
10company include assets which are available for distribution to
the company by way of dividend by any other company it
controls.””

(5) In section 686 (excluded circumstances: fundamental change of ownership)—

(a) in subsection (1)(a), for the words from “the person” to “party”)”
15substitute “the party”;

(b) for subsections (2) to (5) substitute—

“(2) There is a fundamental change of ownership of the close
company if, as a result of the transaction or transactions in
securities, the condition in subsection (3) is met.

(3) 20The condition in this subsection is that the original shareholder
or original shareholders taken together with any associate or
associates—

(a) do not directly or indirectly hold more than 25% of the
ordinary share capital of the close company,

(b) 25do not directly or indirectly hold shares in the close
company carrying an entitlement to more than 25% of
the distributions which may be made by the close
company, and

(c) do not directly or indirectly hold shares in the close
30company carrying more than 25% of the total voting
rights in the close company.

(4) In this section “original shareholder” means a person who,
immediately before the transaction in securities (or the first of
the transactions in securities), held any ordinary share capital of
35the close company.

(5) For the purposes of this section, shares of or share capital in the
close company which are held by a person controlled by an
original shareholder, or by two or more original shareholders
taken together, count as shares or share capital held by that
40original shareholder or those original shareholders.””

(6) In section 687 (income tax advantage)—

(a) in subsection (1), in the opening words, for “the person” substitute “a
person”;

(b) in subsection (2)—

(i) 45after “to the person” insert “or an associate of the person”;

(ii) for “the relevant consideration is received” substitute
“Condition A or B in section 685 is met”.

(7) In section 713 (interpretation), at the appropriate place insert—

• “““associate” is to be construed in accordance with section 681DL,
  but as if subsection (4) of that section also included, as persons
  associated with each other, a person as trustee of a settlement
  and an individual, where one or more beneficiaries of the
  5settlement are connected or associated with the individual;”.”

(8) The amendments made by this section have effect in relation to—

(a) a transaction occurring on or after 6 April 2016, or

(b) a series of transactions any one or more of which occurs on or after that
date.

(9) 10Accordingly, Chapter 1 of Part 13 of ITA 2007 has effect without the
amendments made by this section in relation to a tax advantage obtained on or
after 6 April 2016 in consequence of—

(a) a transaction occurring before that date, or

(b) a series of transactions all of which occur before that date.

(10) 15Where—

(a) before 6 April 2016 a person provides particulars to the Commissioners
for Her Majesty’s Revenue and Customs under section 701 of ITA 2007
in respect of a transaction or transactions,

(b) on the basis of Chapter 1 of Part 13 of ITA 2007 as it has effect apart from
20this section, notification is given under section 701 of that Act that no
counteraction notice ought to be served about the transaction or
transactions,

(c) the transaction, or any one or more of the transactions, occurs on or
after 6 April 2016, and

(d) 25the person would, but for the notification, be liable for counteraction of
an income tax advantage from the transaction or transactions under
Chapter 1 of Part 13 of ITA 2007 as amended by this section,

the notification is void and section 702(2) of ITA 2007 does not apply in relation
to the transaction or transactions.

34 30Transactions in securities: procedure for counteraction of advantage

(1) Chapter 1 of Part 13 of ITA 2007 (transactions in securities) is amended as
follows.

(2) For section 695 (preliminary notification) substitute—

“695 Notice of enquiry

(1) 35An officer of Revenue and Customs may enquire into a transaction or
transactions if—

(a) the officer has reason to believe that section 684 (person liable to
counteraction of income tax advantage) may apply to a person
(“the taxpayer”) in respect of the transaction or transactions,
40and

(b) the officer notifies the taxpayer of his intention to do so.

(2) The notification may be given at any time not more than 6 years after
the end of the tax year to which the income tax advantage in question
relates.””

(3) 45Omit sections 696 and 697 (opposed notifications).

(4) In section 698 (counteraction notices), for subsection (1) substitute—

“(1) If on an enquiry under section 695 an officer of Revenue and Customs
determines that section 684 applies to the taxpayer, the income tax
advantage in question is to be counteracted by adjustments, unless the
5officer is of the opinion that no counteraction is required.””

(1) In that section, for subsection (5) substitute—

“(5) An assessment may be made in accordance with a counteraction notice
at any time (without regard to any time limit on making the assessment
that would otherwise apply).””

(6) 10After that section insert—

“698A No-counteraction notices

(1) If on an enquiry under section 695 an officer of Revenue and Customs
is of the opinion that no counteraction is required, the officer must
serve notice on the person (a “no-counteraction notice”) stating that no
15counteraction is required and why.

(2) The taxpayer may apply to the tribunal for a direction requiring an
officer of Revenue and Customs to issue one of the following within a
specified period—

(a) a counteraction notice;

(b) 20a no-counteraction notice.

(3) Any such application is to be subject to the relevant provisions of Part
5 of TMA 1970 (see, in particular, section 48(2)(b) of that Act).

(4) The tribunal must give the direction applied for unless satisfied that
there are reasonable grounds for not serving either a counteraction
25notice or a no-counteraction notice within a specified period.””

(7) In section 684 (person liable to counteraction), for subsection (4) substitute—

“(4) This section is subject to no-counteraction notices issued under section
698A.””

(8) The amendments made by this section have effect in relation to—

(a) 30a transaction occurring on or after 6 April 2016, or

(b) a series of transactions any one or more of which occurs on or after that
date.

(9) Accordingly, Chapter 1 of Part 13 of ITA 2007 has effect without the
amendments made by this section in relation to a tax advantage obtained on or
35after 6 April 2016 in consequence of—

(a) a transaction occurring before that date, or

(b) a series of transactions all of which occur before that date.

35 Distributions in a winding up

(1) In Chapter 3 of Part 4 of ITTOIA 2005 (dividends and other distributions from

UK resident companies), after section 396A insert—

“396B Distributions in a winding up

(1) For the purposes of this Chapter, a distribution made to an individual
in respect of share capital in the winding up of a UK resident company
5is a distribution of the company if—

(a) 5Conditions A to D are met, and

(b) the distribution is not excluded (see subsection (7)).

(2) Condition A is that, immediately before the winding up, the individual
has at least a 5% interest in the company.

(3) 10Condition B is that the company—

(a) is a close company when it is wound up, or

(b) was a close company at any time in the period of two years
ending with the start of the winding up.

(4) Condition C is that, at any time within the period of two years
15beginning with the date on which the distribution is made—

(a) the individual carries on a trade or activity which is the same as,
or similar to, that carried on by the company or an effective 51%
subsidiary of the company,

(b) the individual is a partner in a partnership which carries on
20such a trade or activity,

(c) the individual, or a person connected with him or her, is a
participator in a company in which he or she has at least a 5%
interest and which at that time—

(i) carries on such a trade or activity, or

(ii) 25is connected with a company which carries on such a
trade or activity, or

(d) the individual is involved with the carrying on of such a trade
or activity by a person connected with the individual.

(5) Condition D is that it is reasonable to assume, having regard to all the
30circumstances, that—

(a) the main purpose or one of the main purposes of the winding
up is the avoidance or reduction of a charge to income tax, or

(b) the winding up forms part of arrangements the main purpose or
one of the main purposes of which is the avoidance or reduction
35of a charge to income tax.

(6)
The circumstances referred to in subsection (5) include in particular the
fact that Condition C is met.

(7) A distribution to an individual is excluded if or to the extent that—

(a) the amount of the distribution does not exceed the amount that
40would result in no gain accruing for the purposes of capital
gains tax, or

(b) the distribution is a distribution of irredeemable shares.

(8) In this section—

• “arrangements” includes any agreement, understanding, scheme,
  45transaction or series of transactions, whether or not legally
  enforceable;

Finance BillPage 56

• “effective 51% subsidiary” has the meaning given by section 170(7)
  of TCGA 1992;

• “participator” has the meaning given by section 454 of CTA 2010.

(9) For the purposes of this section, an individual has at least a 5% interest
5in a company if—

(a) at least 5% of the ordinary share capital of the company is held
by the individual, and

(b) at least 5% of the voting rights in the company are exercisable
by the individual by virtue of that holding.

(10)
10For the purposes of subsection (9) if an individual holds any shares in
a company jointly or in common with one or more other persons, he or
she is to be treated as sole holder of so many of them as is proportionate
to the value of his or her share (and as able to exercise voting rights by
virtue of that holding).””

(2) 15In Chapter 4 of Part 4 of ITTOIA 2005 (dividends from non-UK resident
companies), after section 404 insert—

“404A Distributions in a winding up

(1) For the purposes of this Chapter, a distribution made to an individual
in respect of share capital in a winding up of a non-UK resident
20company is a dividend of the company if—

(a) Conditions A to D are met, and

(b) the distribution is not excluded (see subsection (7)).

(2) Condition A is that, immediately before the winding up, the individual
has at least a 5% interest in the company.

(3) 25Condition B is that the company—

(a) is a close company when it is wound up, or

(b) was a close company at any time in the period of two years
ending with the start of the winding up.

(4) Condition C is that, at any time within the period of two years
30beginning with the date on which the distribution is made—

(a) the individual carries on a trade or activity which is the same as,
or similar to, that carried on by the company or an effective 51%
subsidiary of the company,

(b) the individual is a partner in a partnership which carries on
35such a trade or activity,

(c) the individual, or a person connected with him or her, is a
participator in a company in which he or she has at least a 5%
interest and which at that time—

(i) carries on such a trade or activity, or

(ii) 40is connected with a company which carries on such a
trade or activity, or

(d) the individual is involved with the carrying on of such a trade
or activity by a person connected with the individual.

(5) Condition D is that it is reasonable to assume, having regard to all the
45circumstances, that—

(a) the main purpose or one of the main purposes of the winding
up is the avoidance or reduction of a charge to income tax, or

(b) the winding up forms part of arrangements the main purpose or
one of the main purposes of which is the avoidance or reduction
of a charge to income tax.

(6)
The circumstances referred to in subsection (5) include in particular the
5fact that Condition C is met.

(7) A distribution to an individual is excluded if or to the extent that—

(a) the amount of the distribution does not exceed the amount that
would result in no gain accruing for the purposes of capital
gains tax, or

(b) 10the distribution is a distribution of irredeemable shares.

(8) In this section—

• “arrangements” includes any agreement, understanding, scheme,
  transaction or series of transactions, whether or not legally
  enforceable;

• 15“close company” includes a company which would be a close
  company if it were a UK resident company;

• “effective 51% subsidiary” has the meaning given by section 170(7)
  of TCGA 1992;

• “participator” has the meaning given by section 454 of CTA 2010.

(9) 20For the purposes of this section, a person has at least a 5% interest in a
company if—

(a) at least 5% of the ordinary share capital of the company is held
by the individual, and

(b) at least 5% of the voting rights in the company are exercisable
25by the individual by virtue of that holding.

(10)
For the purposes of subsection (9) if an individual holds any shares in
a company jointly or in common with one or more other persons, he or
she is to be treated as sole holder of so many of them as is proportionate
to the value of his or her share (and as able to exercise voting rights by
30virtue of that holding).””

(3) The amendments made by this section have effect in relation to distributions
made on or after 6 April 2016.

Disguised fees and carried interest

36 Disguised investment management fees

(1) 35Section 809EZA of ITA 2007 (disguised investment management fees: charge
to income tax) is amended as specified in subsections (2) and (3).

(2) In subsection (3)—

(a) in paragraph (a), for “performs” substitute “at any time performs or is
to perform”;

(b) 40omit paragraph (b);

(c) in paragraph (c), for “the scheme” substitute “an investment scheme”.

(3) After subsection (6) insert—

“(7) The reference in subsection (6)(a) to a collective investment scheme
includes—

(a) arrangements which permit an external investor to participate
in investments acquired by the collective investment scheme
without participating in the scheme itself, and

(b) arrangements under which sums arise to an individual
5performing investment management services in respect of the
collective investment scheme without those sums arising from
the scheme itself.””

(4) In section 809EZE of that Act (interpretation), in subsection (1), in paragraph
(a) of the definition of “external investor”, for “performs” substitute “at any
10time performs or is to perform”.

(5) The amendments made by this section have effect in relation to sums arising
on or after 6 April 2016 (whenever the arrangements under which the sums
arise were made).

37 Income-based carried interest

(1) 15In Chapter 5E of Part 13 of ITA 2007 (tax avoidance: disguised investment
management fees), in section 809EZB(1) (meaning of “management fee”), for
paragraph (c) substitute—

“(c) carried interest which is not income-based carried interest (see
sections 809EZC and 809EZD for carried interest, and Chapter
205F for income-based carried interest).””

(2) After Chapter 5E of Part 13 of ITA 2007 insert—

““CHAPTER 5F Income-based carried interest

Income-based carried interest

809FZA Overview

(1) 25This Chapter determines when carried interest arising to an individual
from an investment scheme is “income-based carried interest” for the
purposes of Chapter 5E (and, in particular, section 809EZB(1)(c)).

(2) Section 809FZB contains the general rule, under which the extent to
which carried interest is income-based carried interest depends on the
30average holding period of the investment scheme.

(3) Sections 809FZC to 809FZP contain further provision relating to
average holding periods.

(4) Sections 809FZQ and 809FZR contain a particular rule for direct
lending funds.

(5) 35Sections 809FZS and 809FZT contain an exception to the general rule
for carried interest which is conditionally exempt from income tax.

(6) Sections 809FZU to 809FZZ contain supplementary and interpretative
provision.

(7) Nothing in this Chapter affects the liability to any tax of—

(a) 40the investment scheme, or

(b) external investors in the investment scheme.

809FZB Income-based carried interest: general rule

(1) “Income-based carried interest” is the relevant proportion of a sum of
carried interest arising to an individual from an investment scheme.

(2) 5The relevant proportion is determined by reference to the investment
scheme’s average holding period as follows.

(3) This section is subject to the following provisions of this Chapter.

15Average holding period

809FZC Average holding period

(1) The average holding period of an investment scheme, in relation to a
sum of carried interest, is the average length of time for which relevant
investments have been held for the purposes of the scheme.

(2) 20In this section, “relevant investments” means investments—

(a) which are made for the purposes of the scheme, and

(b) by reference to which the carried interest is calculated.

(3) The average holding period is calculated by reference to the time the
carried interest arises.

(4) 25It is calculated as follows.

Step 1

For each relevant investment, multiply the value invested at the time
the investment was made by the length of time for which the
investment has been held.

30Step 2

Add together the amounts produced under step 1 in respect of all
relevant investments.

Step 3

Divide the amount produced under step 2 by the total value invested in
35all relevant investments.

(5) Disregard intermediate holdings or intermediate holding structures
(including intermediate investment schemes) by or through which
investments are made or held—