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Finance Bill
Schedule 7 — Avoidance involving financial arrangements

111

 

words following that paragraph substitute—

   

“but nothing in sub-paragraph (1) above prevents the person to

whom those rights are transferred from being regarded for the

purposes of this Chapter as being party to the loan relationship as a

result of the transfer.”.

5

      (5)  

The amendments made by this paragraph have effect in any case where the

transfer mentioned in paragraph 15(3)(a) of Schedule 9 to FA 1996 is on or

after 2nd December 2004, whenever the repo or stock-lending arrangements

in question were entered into.

      (6)  

In any case involving an arrangement for the sale and repurchase of

10

securities where the arrangement—

(a)   

falls within section 737E(1)(b) of ICTA, and

(b)   

involves securities (“substituted securities”) being substituted for

other securities,

           

the substitution of any securities on or after 2nd December 2004 shall be

15

treated for the purposes of sub-paragraph (5) as if it were a transfer falling

within paragraph 15(3)(a) of Schedule 9 to FA 1996.

Capital redemption policies: computations on the I minus E basis

20    (1)  

In Schedule 11 to FA 1996 (loan relationships: special provision for insurers)

paragraph 1 (I minus E basis) is amended as follows.

20

      (2)  

After sub-paragraph (1B) insert—

   “(1C)  

In applying the I minus E basis for any accounting period in

respect of any life assurance business carried on by an insurance

company, no credits or debits shall be brought into account in

respect of any debtor relationship that represents a capital

25

redemption policy, within the meaning of Chapter 2 of Part 13 of

the Taxes Act 1988.”.

      (3)  

The amendment made by this paragraph has effect in relation to a debtor

relationship on and after 10th February 2005 (whenever the capital

redemption policy was effected).

30

Relevant discounted securities: corporate strips

21    (1)  

Schedule 13 to FA 1996 (discounted securities: income tax) is amended as

follows.

      (2)  

In paragraph 3 (meaning of “relevant discounted security”) in sub-

paragraph (1), for “paragraph 14(1)” substitute “paragraphs 13B(1) and

35

14(1)”.

      (3)  

In paragraph 4 (meaning of “transfer”)—

(a)   

in sub-paragraph (1), after “Subject to sub-paragraph (2)” insert “and

paragraph 13B(4)”;

(b)   

in sub-paragraph (5), after “without prejudice to paragraph” insert

40

“13B(2) to (5) or”.

      (4)  

In paragraph 5 (redemption to include conversion), in sub-paragraph (3),

 

 

Finance Bill
Schedule 7 — Avoidance involving financial arrangements

112

 

after “This paragraph does not apply to” insert “—

(a)   

the conversion of an interest-bearing corporate security

into corporate strips (see paragraph 13A(2) to (7) below),

or

(b)   

”.

5

      (5)  

After paragraph 13 (excluded indexed securities) insert—

“Meaning of corporate strip and conversion into corporate strips

13A   (1)  

In this Schedule “corporate strip” means any asset—

(a)   

which is, or has at any time been, one of the separate assets

mentioned in sub-paragraph (2) below, and

10

(b)   

which is not prevented from being a corporate strip by

sub-paragraph (9) below.

      (2)  

For the purposes of this Schedule a person converts an interest-

bearing corporate security into corporate strips of the security if he

has an interest-bearing corporate security (“the converted

15

corporate security”) but—

(a)   

as a result of any scheme or arrangements, he comes to

have two or more separate assets in place of the converted

corporate security,

(b)   

each of those separate assets satisfies condition A,

20

(c)   

those separate assets, taken together, satisfy condition B,

and

(d)   

at least one of those separate assets is not prevented from

being a corporate strip by sub-paragraph (9) below,

           

and related expressions shall be construed accordingly.

25

      (3)  

Condition A is that the asset—

(a)   

represents the right to, or

(b)   

secures,

           

one or more stripped payments.

      (4)  

For the purposes of this paragraph, a “stripped payment” is—

30

(a)   

the payment of, or

(b)   

a payment corresponding to,

           

the whole or a part of one or more payments (whether of interest

or principal) remaining to be made under the converted corporate

security.

35

      (5)  

Condition B is that the assets, taken together,—

(a)   

represent the right to, or

(b)   

secure,

           

every payment (whether of interest or principal) remaining to be

made under the converted corporate security (or payments

40

corresponding to every such payment).

      (6)  

Where a person—

(a)   

has an interest-bearing corporate security, but

(b)   

sells or transfers the right to one or more payments

remaining to be made under it (so that, as a result, there are

45

 

 

Finance Bill
Schedule 7 — Avoidance involving financial arrangements

113

 

two or more separate assets which, taken together, satisfy

condition B),

           

this Schedule has effect as if, as a result of a scheme or

arrangements, the person had come to have the separate assets in

place of the security immediately before the sale or transfer.

5

      (7)  

For the purposes of this Schedule, sub-paragraphs (2) to (6) above

also have effect in relation to each of the separate assets mentioned

in sub-paragraph (2) above as if it were itself an interest-bearing

corporate security (if that is not in fact the case).

      (8)  

Where sub-paragraphs (2) to (6) above have effect by virtue of sub-

10

paragraph (7) above—

(a)   

any reference in this Schedule to converting an interest-

bearing corporate security into corporate strips of the

security shall be construed accordingly, and

(b)   

sub-paragraph (1) above (meaning of “corporate strip”)

15

has effect accordingly.

      (9)  

An asset is not a corporate strip if it—

(a)   

represents the right to, or

(b)   

secures,

           

payments of, or corresponding to, a part of every payment

20

remaining to be made under an interest-bearing corporate security

or a corporate strip.

     (10)  

After a balance has been struck for a dividend on an interest-

bearing corporate security, any payment to be made in respect of

that dividend shall, at times falling after that balance has been

25

struck, be treated for the purposes of this paragraph as not being

a payment remaining to be made under the security.

           

References to payments the right to which a separate asset

represents or secures shall be construed accordingly.

Corporate strips deemed to be relevant discounted securities

30

13B   (1)  

Every corporate strip is a relevant discounted security.

      (2)  

Where a person converts an interest-bearing corporate security

into corporate strips of the security, he shall be deemed to have

paid, in respect of his acquisition of each corporate strip, an

amount determined in accordance with sub-paragraph (3) below.

35

      (3)  

The amount is that which bears to the acquisition cost of the

converted corporate security the proportion that SMV bears to

TMV, where—

SMV is the market value of the corporate strip, and

TMV is the total of the market values of all the separate assets

40

resulting from the conversion.

      (4)  

If the converted corporate security is a relevant discounted

security—

(a)   

its conversion into corporate strips is deemed to be a

transfer of the security, and

45

 

 

Finance Bill
Schedule 7 — Avoidance involving financial arrangements

114

 

(b)   

the amount payable on the transfer is deemed to be an

amount equal to the acquisition cost of the converted

corporate security.

      (5)  

Where corporate strips are consolidated into a single security—

(a)   

by being exchanged by any person for that security, or

5

(b)   

by being otherwise converted by any person into that

security under any arrangements,

           

each of the corporate strips shall be deemed to have been

redeemed, at the time of the exchange or other conversion, by the

payment to that person of an amount equal to its market value.

10

      (6)  

Sub-paragraphs (2) to (5) above have effect for the purposes of this

Schedule.

      (7)  

For the purposes of this paragraph, the acquisition cost of the

converted corporate security is the amount paid in respect of his

acquisition of the security by the person who has it immediately

15

before the conversion (no account being taken of any costs

incurred in connection with that acquisition).

      (8)  

References in this paragraph to the market value of a security

given or received in exchange for, or otherwise converted into,

another are references to its market value at the time of the

20

exchange or conversion.

Corporate strips: manipulation of acquisition, sale or redemption price

13C   (1)  

This paragraph applies in any case where, as a result of any

scheme or arrangement,—

(a)   

the amount paid by a person in respect of his acquisition of

25

a corporate strip is or was more than the market value of

the corporate strip at the time of that acquisition,

(b)   

the amount payable to a person on a transfer of a corporate

strip by him is less than the market value of the corporate

strip at the time of the transfer, or

30

(c)   

on redemption of a corporate strip, the amount payable to

a person, as the person holding the corporate strip, is less

than the market value of the corporate strip on the day

before redemption,

           

and the obtaining of a tax advantage by any person is the main

35

benefit, or one of the main benefits, that might have been expected

to accrue from, or from any provision of, the scheme or

arrangement.

      (2)  

In a case falling within sub-paragraph (1)(a) above, the person

shall be treated for the purposes of paragraph 1(2)(b) above on a

40

transfer of the corporate strip by him as if he had paid in respect

of his acquisition of the corporate strip an amount equal to the

market value of the corporate strip at the time of that acquisition.

      (3)  

In a case falling within sub-paragraph (1)(b) above, the person

shall be treated for the purposes of paragraph 1(2)(b) above as if

45

the amount payable to him on the transfer were an amount equal

to the market value of the corporate strip at the time of the

transfer.

 

 

Finance Bill
Schedule 7 — Avoidance involving financial arrangements

115

 

      (4)  

In a case falling within sub-paragraph (1)(c) above, the person

shall be treated for the purposes of paragraph 1(2)(b) above as if

the amount payable to him on redemption were an amount equal

to the market value of the corporate strip on the day before

redemption.

5

      (5)  

The market value of a corporate strip at any time shall be

determined for the purposes of this paragraph without regard to

any increase or diminution in the value of the corporate strip as a

result of the scheme or arrangement mentioned in sub-paragraph

(1) above.

10

      (6)  

For the purposes of this paragraph, no account shall be taken of

any costs incurred in connection with any transfer or redemption

of a corporate strip or its acquisition.

      (7)  

In this paragraph “tax advantage” has the meaning given by

section 709(1) of the Taxes Act 1988.

15

Corporate strips: manipulation of price: associated payment giving rise to CGT loss

13D   (1)  

Where—

(a)   

as a result of any scheme or arrangement which has an

unallowable purpose, the circumstances are, or might have

been, as mentioned in paragraph (a), (b) or (c) of paragraph

20

13C(1) above,

(b)   

under the scheme or arrangement, a payment falls to be

made otherwise than in respect of the acquisition or

disposal of a corporate strip, and

(c)   

as a result of that payment or the circumstances in which it

25

is made, a loss accrues to any person for the purposes of

capital gains tax,

           

the loss shall not be an allowable loss for the purposes of capital

gains tax.

      (2)  

For the purposes of this paragraph, a scheme or arrangement has

30

an unallowable purpose if the main benefit, or one of the main

benefits, that might have been expected to result from, or from any

provision of, the scheme or arrangement (apart from paragraph

13C above and this paragraph) is—

(a)   

the obtaining of a tax advantage by any person, or

35

(b)   

the accrual to any person of an allowable loss for the

purposes of capital gains tax.

      (3)  

In this paragraph “tax advantage” has the meaning given by

section 709(1) of the Taxes Act 1988.”.

      (6)  

In paragraph 15(1) (general interpretation) insert each of the following

40

definitions at the appropriate place—

“ “corporate strip” has the meaning given by paragraph 13A

above;”;

“ “interest-bearing corporate security” means any interest-

bearing security other than—

45

(a)   

a security issued by the government of a territory;

(b)   

a share in a company;”;

 

 

Finance Bill
Schedule 7 — Avoidance involving financial arrangements

116

 

“ “interest-bearing security” includes any loan stock or similar

security;”.

      (7)  

In paragraph 15(1)—

(a)   

in the definition of “relevant discounted security”, after “paragraphs

3” insert “, 13B(1)”;

5

(b)   

in the definition of “strip”, after ““strip”” insert “, except in the

expression “corporate strip”,”.

      (8)  

The amendments made by this paragraph have effect in any case where a

person acquires a corporate strip on or after 2nd December 2004 otherwise

than in pursuance of an agreement entered into before that date.

10

Transactions within groups: treatment of transferee company

22    (1)  

In Schedule 26 to FA 2002 (derivative contracts) paragraph 28 (transactions

within groups) is amended as follows.

      (2)  

For sub-paragraph (3) (the credits and debits to be brought into account)

substitute—

15

    “(3)  

For the purpose of determining the credits and debits to be

brought into account for the purposes of this Schedule in respect

of the derivative contract—

(a)   

for the accounting period in which the transaction or, as

the case may be, the first of the series of transactions takes

20

place, the transferor company shall be treated as having

entered into that transaction for a consideration equal to

the notional carrying value of the contract; and

(b)   

for any accounting period in which it is a party to the

contract, the transferee company shall be treated as if it

25

had acquired the contract for a consideration equal to its

notional carrying value.

           

For the purposes of this sub-paragraph the notional carrying value

is the amount that would have been the carrying value of the

derivative contract in the accounts of the transferor company if a

30

period of account had ended immediately before the date when

the company ceased to be party to the contract.”.

      (3)  

In sub-paragraph (5), after “In this paragraph” insert the following

definition—

““carrying value” has the same meaning as it has for the

35

purposes of paragraph 50A;”.

      (4)  

Where the period of account mentioned in the second sentence of the sub-

paragraph (3) substituted by sub-paragraph (2) begins before 1st January

2005, “carrying value” shall be construed as if the period had begun on or

after that date.

40

      (5)  

The amendments made by this paragraph have effect in any case where the

relevant transaction is on or after 16th March 2005.

      (6)  

In this paragraph “the relevant transaction” means—

(a)   

the related transaction mentioned in sub-paragraph (2)(a) of

paragraph 28 of Schedule 26 to FA 2002,

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Finance Bill
Schedule 7 — Avoidance involving financial arrangements

117

 

(b)   

the first of the series of related transactions mentioned in sub-

paragraph (2)(b) of that paragraph, or

(c)   

the transfer mentioned in sub-paragraph (2)(c) or (2)(d) of that

paragraph,

           

by virtue of which that paragraph applies or would apply apart from

5

paragraph 30 of that Schedule.

Transactions within groups: fair value accounting

23    (1)  

In Schedule 26 to FA 2002 (derivative contracts) paragraph 30 (transactions

within groups: fair value accounting) is amended as follows.

      (2)  

In sub-paragraph (1), for paragraph (b) (treatment of transferee in respect of

10

the transaction) substitute—

“(b)   

paragraph 28(3)(b) shall have effect in relation to the

transferee company.”.

      (3)  

The amendment made by this paragraph has effect in any case where the

relevant transaction is on or after 16th March 2005.

15

      (4)  

In this paragraph “the relevant transaction” has the same meaning as in

paragraph 22.

Transferee leaving group after replacing transferor as party to derivative contract

24    (1)  

In Schedule 26 to FA 2002 (derivative contracts) after paragraph 30 insert—

“Transferee leaving group after replacing transferor as party to derivative contract

20

30A   (1)  

This paragraph applies in any case where—

(a)   

paragraph 28 applies—

(i)   

by virtue of sub-paragraph (2)(a) of that paragraph

(“case A”), or

(ii)   

by virtue of sub-paragraph (2)(b) of that paragraph

25

(“case B”), but

(b)   

before the end of the relevant 6 year period, the transferee

company ceases to be a member of the relevant group.

      (2)  

In any such case, this Schedule shall have effect as if the transferee

company had—

30

(a)   

immediately before that cessation, assigned its rights and

liabilities under the relevant derivative contract for a

consideration of an amount equal to their fair value at that

time, and

(b)   

immediately reacquired them for a consideration of the

35

same amount,

           

but only if Condition 1 or 2 is satisfied and sub-paragraph (5) does

not apply.

      (3)  

Condition 1 is that if sub-paragraph (2) has effect, a credit would

in consequence of paragraph (a) of that sub-paragraph fall to be

40

brought into account for the purposes of this Schedule by the

transferee company.

      (4)  

Condition 2 is that—

 

 

 
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