Income Tax (Trading and Other Income) Bill

House of Commons

Session 2004 - 05
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Income Tax (Trading and Other Income) Bill

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 8 — Profits from deeply discounted securities
183

(3)
In this section “redemption period” means the period between the date of issue
and the date of the occasion of redemption in question.
(4)
Interest payable on an occasion of redemption is ignored in determining for the
purposes of this section the amount payable on that occasion.
(5)
For the purposes of this section, in the case of an issue to which section 442
5
applies (securities issued in accordance with qualifying earn-out right), the
issue price of the security is to be taken as the amount paid to acquire it (see
section 442(2)).
(6)
The general rule in subsection (1) is subject to—
section 431 (excluded occasions of redemption),
10
section 432 (securities which are not deeply discounted securities),
sections 434 to 436 (securities issued in separate tranches), and
section 443(1) (strips of government securities).
431
Excluded occasions of redemption
(1)
An occasion of redemption of a security other than maturity is ignored for the
15
purposes of section 430(1) if the third-party option conditions or the
commercial protection conditions are met.
(2)
The third-party option conditions are that—
(a)
the security may be redeemed on the occasion at the option of a person
other than its holder,
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(b)
the security is issued to a person who is not connected with the issuer,
and
(c)
the obtaining of a tax advantage by any person is not the main benefit,
or one of the main benefits, that might have been expected to accrue
from the provision in accordance with which the security may be
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redeemed on the occasion.
(3)
The commercial protection conditions are that—
(a)
the security may be redeemed on the occasion as the result of an
exercise of an option that is exercisable only on the occurrence of—
(i)
an event adversely affecting the holder (see subsection (8)), or
30
(ii)
a default by any person, and
(b)
as at the time of the security’s issue it appears unlikely that the option
will be exercisable on the occasion.
(4)
Subsection (1) does not apply to an occasion just because the occasion coincides
or may coincide with an occasion meeting the third-party option conditions or
35
the commercial protection conditions.
(5)
If—
(a)
the only reason that a security is not a deeply discounted security is that
an occasion on which it may be redeemed is ignored because the third-
party option conditions are met, and
40
(b)
at some time after its issue the security is acquired by, or its holder
becomes, a person connected with the issuer,

in relation to that time and later this Chapter applies as if the security were a
deeply discounted security.
(6)
If a person (“P”) who is not connected with the issuer acquires—
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Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 8 — Profits from deeply discounted securities
184

(a)
a security which is only a deeply discounted security because it was
issued to a person connected with the issuer and so fails to meet the
condition specified in subsection (2)(b), or
(b)
a security within subsection (5),

this Chapter applies in relation to P as if the security ceased to be a deeply
5
discounted security on the acquisition.
(7)
For the purposes of the application of this section to a security, the question
whether persons are connected is determined without regard to the security or
any other security issued under the same prospectus.
(8)
In this section “event adversely affecting the holder”, in relation to a security,
10
means an event the occurrence of which appears, as at the time of the security’s
issue, likely to have an adverse effect on the interests of its holder at the time
of the event if there were no provision for redemption on its occurrence.
432
Securities which are not deeply discounted securities
(1)
The following are not deeply discounted securities—
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(a)
shares in a company,
(b)
gilt-edged securities that are not strips,
(c)
life assurance policies, and
(d)
capital redemption policies.
(2)
An excluded indexed security (see section 433) is only a deeply discounted
20
security if treated as such under section 431(5) (acquisition by a person
connected with the issuer or holder becoming such a person).
(3)
In this section “capital redemption policies” has the same meaning as in
Chapter 9 of this Part (see section 473(2)).
(4)
See also sections 434 to 436 (rules under which securities issued under the same
25
prospectus on separate occasions may be treated as being, or as not being,
deeply discounted securities).
433
Meaning of “excluded indexed security”
(1)
In this Chapter “excluded indexed security” means a security under the terms
of which the amount payable on redemption is determined by applying to the
30
amount for which the security was issued the percentage change (if any) over
the security’s redemption period in—
(a)
the value of chargeable assets of a particular description, or
(b)
an index of the value of such assets.
(2)
The fact that the terms under which the security is issued include a provision
35
to the effect that the amount payable on its redemption must be at least a
specified percentage of the amount for which it was issued only prevents it
from falling within the definition in subsection (1) if that percentage exceeds
10%.
(3)
Interest payable on redemption is ignored in determining for the purposes of
40
this section the amount payable on redemption.
(4)
In subsection (1) “redemption period” means—
(a)
the period beginning with the date of issue and ending with the date of
redemption, or

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 8 — Profits from deeply discounted securities
185

(b)
a period which is or includes almost all that period and only differs
from it for purposes connected with giving effect to a valuation in
relation to rights or liabilities under the security.
(5)
An asset is a chargeable asset for the purposes of subsection (1) if a gain
accruing to a person on its disposal would be a chargeable gain for the
5
purposes of TCGA 1992 on the assumptions specified in subsection (6).
(6)
The assumptions are that—
(a)
the asset is an asset of the person,
(b)
the person is not entitled to the exemption conferred by section 100 of
TCGA 1992 (exemption for authorised unit trusts etc.),
10
(c)
disposal of the asset by the person would not be treated for income tax
purposes as a disposal in the course of a trade, profession or vocation,
and
(d)
section 116(10) of TCGA 1992 is ignored (chargeable gains on
subsequent disposals of qualifying corporate bonds acquired in
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reorganisations, conversions and reconstructions).
(7)
For the purposes of this section—
(a)
neither the retail prices index nor any similar general index of prices
published by the government of a territory or by an agent of such a
government is an index of the value of chargeable assets, and
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(b)
“redemption”, in relation to a security, does not include its redemption
on an occasion which is to be ignored under section 431(1) (excluded
occasions of redemption).
434
Securities issued in separate tranches: preliminary
(1)
Sections 435 and 436 set out rules under which securities issued under the same
25
prospectus on separate occasions may be treated as being, or as not being,
deeply discounted securities.
(2)
If any of the securities in the original issue under the prospectus is a deeply
discounted security—
(a)
the rule in section 435 applies to securities in later issues under it, and
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(b)
the rule in section 436 does not apply to any securities issued under it.
(3)
If none of the securities in the original issue under the prospectus is a deeply
discounted security, the rule in section 435 applies to securities in a later issue
except where the rule in section 436 applies.
435
Securities issued in separate tranches: basic rule
35
(1)
The rule in this section is that if securities in any of the issues made on separate
occasions under the same prospectus are not deeply discounted securities,
securities in any later issue under it are not deeply discounted securities, unless
they are treated as such for one of the reasons specified in subsection (2).
(2)
The reasons are—
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(a)
that the securities were issued to a person connected with the issuer
and so fail to meet the condition specified in section 431(2)(b), and
(b)
that such a person has acquired or become the holder of the securities
and so section 431(5) applies to them.

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 8 — Profits from deeply discounted securities
186

436
Deeply discounted securities issued in separate tranches: nominal value rule
(1)
This section only applies if some of the securities in one or more later issues
under the same prospectus are deeply discounted securities (or are such
securities if the rule in section 435 is ignored).
(2)
The rule in this section applies for any disposal or acquisition after the time
5
when the condition specified in subsection (3) is first met.
(3)
The condition is that the aggregate nominal value as at a particular time of the
securities within subsection (1) exceeds the aggregate nominal value as at that
time of all the other securities issued under the prospectus at any time.
(4)
The rule is that all securities issued under the prospectus (including those
10
issued after the time when the condition specified in subsection (3) is first met)
are to be treated as deeply discounted securities and as having been acquired
as such (whenever actually issued or acquired).
(5)
Subsection (6) applies where the question is whether a security held by a
person who is not connected with the issuer is a deeply discounted security as
15
a result of the rule in this section.
(6)
For the purpose of determining whether the rule in this section applies,
securities that are only within subsection (1) for one of the reasons specified in
section 435(2) are treated as not being within it.
Disposals
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437
Transactions which are disposals
(1)
References in this Chapter to the disposal of a deeply discounted security are—
(a)
to its redemption,
(b)
to its transfer by sale, exchange, gift or otherwise, including a transfer
treated as made by subsection (3), and
25
(c)
so far as not covered by paragraph (a) or (b), to its conversion under its
terms into shares in a company or other securities (including other
deeply discounted securities).
(2)
The person treated as making a disposal is—
(a)
in the case of a disposal within subsection (1)(a), the person entitled as
30
the security’s holder to any payment on the disposal,
(b)
in the case of a disposal within subsection (1)(b), the transferor, and
(c)
in the case of a disposal within subsection (1)(c), the person who would
be entitled as the security’s holder to any payment on the disposal, if
such a payment were made.
35
(3)
A person who dies while entitled to a deeply discounted security is treated as
transferring it immediately before death to the personal representatives.
(4)
In the case of strips, further provision about occasions counting as disposals is
made by section 445(2) and (6)(a).
438
Timing of transfers and acquisitions
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(1)
This section applies if—

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 8 — Profits from deeply discounted securities
187

(a)
a transfer or acquisition of a deeply discounted security is made under
an agreement, and
(b)
the transferee or the person making the acquisition becomes entitled to
the security at the time the agreement is made.
(2)
The transfer or acquisition is treated as occurring at that time.
5
(3)
For this purpose a conditional agreement is taken to be made when the
condition is met.
(4)
This section is subject to section 445(7) (exchanges for and consolidation of
strips).
Calculating profits
10
439
Calculating the profit from disposals
(1)
A person’s profit on a disposal is the amount by which the amount payable on
the disposal exceeds the amount paid by the person to acquire the security.
(2)
No account is to be taken of any incidental expenses incurred in connection
with the disposal or acquisition.
15
(3)
Subsection (2) is subject to subsection (4) and section 455 (listed securities held
since 26th March 2003: calculating the profit or loss on disposals).
(4)
Incidental expenses incurred before 27th March 2003 by the person making the
disposal in connection with the acquisition or disposal of the security are
deducted from the person’s profit.
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(5)
Where a person re-acquires a security, any previous acquisition of it is ignored
in determining on a subsequent disposal—
(a)
the amount the person paid to acquire the security, and
(b)
incidental expenses within subsection (4).
440
Market value disposals
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(1)
On the disposal of a deeply discounted security by a transfer of a kind specified
in subsection (2), for the purposes of this Chapter an amount equal to the
market value at the time of the disposal is treated as payable.
(2)
The transfers are—
(a)
a transfer made otherwise than by a bargain at arm’s length,
30
(b)
a transfer between connected persons,
(c)
a transfer for a consideration which is not wholly in money or money’s
worth,
(d)
a transfer treated as made by section 437(3) (death), and
(e)
a transfer by personal representatives to a legatee.
35
(3)
Subsection (1) is subject to subsection (4).
(4)
On a conversion of a deeply discounted security into shares or other securities
which counts as its disposal under section 437(1), an amount equal to the
market value of the shares or other securities at the time of the conversion is
treated as the amount payable.
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Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 8 — Profits from deeply discounted securities
188

(5)
Subsection (4) is subject to section 445(8) (exchanges for and consolidations of
strips).
(6)
In this section “legatee” includes any person taking (whether beneficially or as
trustee)—
(a)
on a testamentary disposition, or
5
(b)
on an intestacy or partial intestacy.
(7)
Such a person includes a person taking as a result of an appropriation by
personal representatives in or towards the satisfaction of a legacy or other
interest or share in the deceased’s property.
441
Market value acquisitions
10
(1)
A person who acquires a deeply discounted security on a disposal of a kind
specified in subsection (2) is treated for the purposes of this Chapter as
acquiring it by the payment of an amount equal to its market value at the time
of the disposal.
(2)
The disposals are—
15
(a)
a transfer within section 440(2), and
(b)
a conversion of a deeply discounted security into other deeply
discounted securities which counts as its disposal under section 437(1).
(3)
This section is subject to section 445(8) (exchanges for and consolidations of
strips).
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442
Securities issued in accordance with qualifying earn-out right
(1)
This section applies if a security is issued to a person in accordance with the
terms of a qualifying earn-out right.
(2)
The amount paid by the person to acquire the security is to be taken for the
purposes of this Chapter to be the total of—
25
(a)
the market value, immediately before the issue, of the right to be issued
with the security in accordance with the terms of the qualifying earn-
out right, and
(b)
any amount payable for the issue in accordance with those terms.
(3)
In this section “qualifying earn-out right” means a right that meets conditions
30
A to C, or so much of a right as does so.
(4)
Condition A is that the right constitutes the whole or part of the consideration
for—
(a)
the transfer by the person on whom the right is conferred of shares in
or debentures of a company, or
35
(b)
the transfer of the whole or part of—
(i)
a business carried on by that person, or by that person and
others in partnership, or
(ii)
an interest in such a business.
(5)
Condition B is that the right is either—
40
(a)
a right to be issued with securities of another company, or
(b)
a right which is capable of being discharged in accordance with its
terms by the issue of such securities.

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 8 — Profits from deeply discounted securities
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(6)
Condition C is that the right is such that the value of the consideration
mentioned in condition A is unascertainable at the time when the right is
conferred.
Special rules for strips of government securities
443
Application of this Chapter to strips of government securities
5
(1)
All strips are treated as deeply discounted securities for the purposes of this
Chapter, whether or not they would otherwise be so.
(2)
This Chapter applies to strips subject to the rules in—
(a)
section 445 (strips of government securities: acquisitions and
disposals),
10
(b)
section 446 (strips of government securities: relief for losses),
(c)
section 447 (restriction of profits on strips by reference to original
acquisition cost),
(d)
section 448 (restriction of losses on strips by reference to original
acquisition cost),
15
(e)
section 449 (strips of government securities: manipulation of
acquisition, transfer or redemption payments),
(f)
section 450 (market value of strips etc.), and
(g)
section 451 (market value of strips etc. quoted in foreign stock exchange
lists).
20
444
Meaning of “strip” in Chapter 8
(1)
In this Chapter “strip”, in relation to any stock or bond (“the underlying
security”), means a security which—
(a)
meets conditions A to C,
(b)
if it was acquired after 26th March 2003, was issued by or on behalf of
25
the government of any territory, and
(c)
if it was acquired on or before that date, was issued under the National
Loans Act 1968 (c. 13) in a case where the underlying security was itself
a gilt-edged security.
(2)
Condition A is that the security is issued for the purpose of representing the
30
right to or of securing—
(a)
a payment corresponding to a payment of interest or principal
remaining to be made under the underlying security, or
(b)
two or more payments each corresponding to a payment to be so made.
(3)
Condition B is that the security is issued in conjunction with the issue of one or
35
more other securities which, together with that security—
(a)
represent the right to, or
(b)
secure,

payments corresponding to every payment remaining to be made under the
underlying security.
40
(4)
Condition C is that the security is not itself a security which—
(a)
represents the right to, or
(b)
secures,