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Finance Bill
Schedule 7 — Avoidance involving financial arrangements

90

 

section 18(3B) of ICTA) substitute—

“(2)   

This section does not have effect in relation to a sale or transfer if the

proceeds of the sale or transfer are chargeable to tax.”.

      (5)  

Omit subsection (2A) (loan relationships).

      (6)  

For subsection (3) substitute—

5

“(3)   

The proceeds of any subsequent sale or other realisation of the right

to receive the distribution shall not, for any of the purposes of the Tax

Acts, be regarded as the income of the seller or the person on whose

behalf the right is otherwise realised.”.

      (7)  

In subsection (4), in the words following paragraph (b) after their

10

substitution by paragraph 300(3)(b) of Schedule 1 to ITTOIA 2005, for

“interest” substitute “distribution”.

      (8)  

In subsection (4A), for “interest arising” substitute “distribution”.

      (9)  

In subsection (4B), for “interest” substitute “distribution”.

     (10)  

For subsection (7) (definitions) substitute—

15

“(7)   

In this section—

“distribution”, in relation to shares in a company,—

(a)   

has the same meaning as it has in the Corporation Tax

Acts (see section 209), but

(b)   

also includes any amount that would be a distribution

20

if the company paying it were resident in the United

Kingdom;

“shares” means shares in a company.”.

     (11)  

In subsection (8) (information powers) omit from “and for the purpose” to

the end of the subsection.

25

     (12)  

The heading to the section becomes “Transfers of rights to receive

distributions in respect of shares”.

     (13)  

The amendments made by this paragraph have effect in relation to sales or

transfers on or after 2nd December 2004.

Change in ownership of company with investment business

30

3     (1)  

In section 768B(10) of ICTA (Part 4 of Schedule 28A to have effect for

restricting the debits to be brought into account in respect of loan

relationships) after “debits”, where first occurring, insert “and non-trading

deficits”.

      (2)  

In section 768C(9) of ICTA (Part 4 of Schedule 28A to have effect for

35

restricting the debits to be brought into account in respect of loan

relationships) after “debits”, where first occurring, insert “and non-trading

deficits”.

      (3)  

Schedule 28A to ICTA (change in ownership of investment company:

deductions) is amended as follows.

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Finance Bill
Schedule 7 — Avoidance involving financial arrangements

91

 

      (4)  

In paragraph 7(b) (apportionment of excess in paragraph 6(c), or of non-

trading deficit, to first part of accounting period) after “the whole amount of

the excess” insert “or, as the case may be, of the deficit”.

      (5)  

After paragraph 9 insert—

“9A   (1)  

This paragraph has effect in any case to which section 768B applies

5

where the non-trading deficit mentioned in paragraph 6(dc) above

is apportioned by paragraph 7(b) above to the first part of the

accounting period being divided.

      (2)  

In any such case, none of that non-trading deficit shall be carried

forward to—

10

(a)   

the accounting period beginning immediately after the

change in the ownership of the company, or

(b)   

any subsequent accounting period.”.

      (6)  

After paragraph 10 insert—

“10A  (1)  

This paragraph has effect in any case to which section 768C

15

applies where the non-trading deficit mentioned in paragraph

13(1)(ec) below is apportioned by paragraph 16(1)(b) below to the

first part of the accounting period being divided.

      (2)  

In any such case, none of that non-trading deficit shall be carried

forward to—

20

(a)   

the accounting period beginning immediately after the

change in the ownership of the company, or

(b)   

any subsequent accounting period.”.

      (7)  

In paragraph 16(1)(b) (apportionment of excess in paragraph 13(1)(ec), or of

non-trading deficit, to first part of accounting period) after “the whole

25

amount of the excess” insert “or, as the case may be, of the deficit”.

      (8)  

The title of Part 4 of the Schedule becomes “Disallowed debits and non-

trading deficits”.

      (9)  

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

change in ownership is on or after 10th February 2005.

30

Transfers of rights to receive annual payments

4     (1)  

After section 775 of ICTA (sale by individual of income derived from his

personal activities) insert—

“775A   

  Transfers of rights to receive annual payments

(1)   

This section applies in any case where—

35

(a)   

a person sells or transfers the right to receive an annual

payment to which this section applies (see subsection (4)),

and

(b)   

the consideration (if any) for the sale or transfer would not,

apart from this section, be chargeable to tax.

40

(2)   

In any such case, tax is charged—

(a)   

in the case of income tax, under this section; or

(b)   

in the case of corporation tax, under Case III of Schedule D.

 

 

Finance Bill
Schedule 7 — Avoidance involving financial arrangements

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(3)   

Where this section applies—

(a)   

the tax is charged on an amount equal to the market value of

the right to receive the annual payment;

(b)   

the tax is charged for the chargeable period in which the sale

or transfer takes place;

5

(c)   

the person liable for the tax is the person who sells or

transfers the right to the annual payment.

(4)   

This section applies to any annual payment other than—

(a)   

an annual payment under a life annuity;

(b)   

an annual payment under a pension annuity;

10

(c)   

an annual payment to which section 347A applies (annual

payments that are not charges on income);

(d)   

an annual payment in respect of which, by virtue of section

727 of ITTOIA 2005 (payments by individuals arising in UK),

no liability to income tax arises under Part 5 of that Act.

15

(5)   

This section applies in relation to part of an annual payment as it

applies in relation to the whole of an annual payment.

(6)   

For the purposes of this section, a sale or transfer of all rights under

an agreement for annual payments, or under an annuity, is a sale or

transfer of the rights to each individual payment under the

20

agreement or annuity.

(7)   

In this section—

“life annuity” means—

(a)   

a life annuity, as defined in section 657(1); or

(b)   

a life annuity, as defined in section 473(2) of ITTOIA

25

2005;

“pension annuity” means an annuity which is pension income

within the meaning of Part 9 of ITEPA 2003 (see section 566(2)

of that Act).”.

      (2)  

The amendment made by this paragraph has effect in relation to sales or

30

transfers on or after 16th March 2005.

Disposals and acquisitions of company loan relationships with or without interest

5     (1)  

Section 807A of ICTA is amended as follows.

      (2)  

After subsection (2A) (exclusion of certain tax) insert—

“(2B)   

Where, in the case of any share, section 91A or 91B of the Finance Act

35

1996 (shares treated as loan relationships) applies in relation to a

company for an accounting period, this section has effect—

(a)   

in relation to a distribution in respect of the share as it has

effect in relation to interest under a loan relationship, and

(b)   

in relation to a distribution accruing in respect of the share at

40

a time when the company does not (within the meaning of

the section in question) hold the share as it applies in relation

to interest accruing under a loan relationship at a time when

the company is not a party to the loan relationship.”.

      (3)  

The amendment made by this paragraph has effect in relation to shares held

45

by a company on or after 16th March 2005.

 

 

Finance Bill
Schedule 7 — Avoidance involving financial arrangements

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Manufactured interest and the accrued income scheme

6     (1)  

In Schedule 23A to ICTA (manufactured dividends and interest) paragraph

3 (manufactured interest on UK securities) is amended as follows.

      (2)  

In sub-paragraph (2A) (restriction on relief under sub-paragraph (2)(c))—

(a)   

in paragraph (a) (receipt of interest or payment representative of it)

5

after “is chargeable to income tax” insert “(and see section 714(5) for

the amount so chargeable in a case where section 714(4) applies)”,

and

(b)   

for paragraph (b) (accrued income scheme) substitute—

“(b)   

is, by virtue of section 714(2), chargeable to income

10

tax on annual profits or gains in respect of transfers

of securities which are subject to the arrangement

giving rise to the payment of manufactured

interest; or”.

      (3)  

In sub-paragraph (2A), in the paragraph (b) so substituted, for “annual

15

profits or gains” substitute “income”.

      (4)  

The amendment made by sub-paragraph (3) has effect in relation to

payments of manufactured interest made on or after 6th April 2005.

      (5)  

The other amendments made by this paragraph have effect in relation to

payments of manufactured interest made on or after 16th March 2005.

20

Consideration due after time of disposal: creditor relationships etc

7     (1)  

Section 48 of TCGA 1992 (consideration due after time of disposal) is

amended as follows.

      (2)  

At the beginning insert “(1)”.

      (3)  

At the end add—

25

“(2)   

Subsection (1) above does not apply in relation to so much of any

consideration as consists of rights under a creditor relationship to

which a company becomes a party as a result of the disposal.

(3)   

In the computation of the gain in a case where subsection (2) above

has effect in relation to any consideration, the amount to be brought

30

into account in respect of that consideration is the fair value of the

creditor relationship.

(4)   

In this section—

(a)   

“creditor relationship”, and

(b)   

“fair value”, in relation to a creditor relationship,

35

   

each have the same meaning as in Chapter 2 of Part 4 of the Finance

Act 1996 (see section 103(1) of that Act).”.

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

8        

In TCGA 1992, after section 151C (strips: manipulation of price: associated

 

 

Finance Bill
Schedule 7 — Avoidance involving financial arrangements

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payment giving rise to loss) insert—

“151D   

 Corporate strips: manipulation of price: associated payment giving

rise to loss

(1)   

This section applies if—

(a)   

as a result of any scheme or arrangement which has an

5

unallowable purpose, the circumstances are, or might have

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

452G(2) of ITTOIA 2005,

(b)   

under the scheme or arrangement, a payment falls to be made

otherwise than in respect of the acquisition or disposal of a

10

corporate strip, and

(c)   

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

made, a loss accrues to any person.

(2)   

The loss shall not be an allowable loss.

(3)   

For the purposes of this section a scheme or arrangement has an

15

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 section 452G of ITTOIA

2005 and this section) is—

(a)   

the obtaining of a tax advantage by any person, or

20

(b)   

the accrual to any person of an allowable loss.

(4)   

The reference in subsection (1)(b) above to the acquisition or disposal

of a corporate strip shall be construed as if it were in Chapter 8 of Part

4 of ITTOIA 2005 (profits from deeply discounted securities) (see, in

particular, sections 437 and 452F of that Act for the meaning of

25

“disposal” and section 452E of that Act for the meaning of “corporate

strip”).

(5)   

In subsection (3)(a) above “tax advantage” has the meaning given by

section 709(1) of the Taxes Act.

(6)   

This section applies to losses accruing on or after 6th April 2005.”.

30

Transactions within a group: shares subject to third party obligations

9     (1)  

Section 171 of TCGA 1992 (transfers within a group: general provisions) is

amended as follows.

      (2)  

After subsection (3) insert—

“(3A)   

Subsection (1) above does not apply—

35

(a)   

if section 91A of the Finance Act 1996 (shares subject to third

party obligations)—

(i)   

does not apply in the case of the asset in relation to

company A immediately before the disposal, but

(ii)   

does apply in the case of the asset in relation to

40

company B immediately after its acquisition, or

(b)   

if that section—

(i)   

applies in the case of the asset in relation to company

A immediately before the disposal, but

 

 

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Schedule 7 — Avoidance involving financial arrangements

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(ii)   

does not apply in the case of the asset in relation to

company B immediately after its acquisition.”.

      (3)  

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

disposal is on or after 16th March 2005.

Shares treated as loan relationships

5

10    (1)  

After section 91 of FA 1996 insert the following heading—

“Shares treated as loan relationships”

      (2)  

After that heading insert the following section—

“91A    

Shares subject to outstanding third party obligations

(1)   

This section applies for the purposes of corporation tax in relation to

10

a company if at any time in an accounting period—

(a)   

that company (“the investing company”) holds a share in

another company (“the issuing company”),

(b)   

the share is subject to outstanding third party obligations (see

subsection (5)), and

15

(c)   

the share is an interest-like investment (see subsections (7)

and (8)).

(2)   

This Chapter shall have effect for the accounting period of the

investing company in accordance with subsection (3) below as if—

(a)   

the share were rights under a creditor relationship of that

20

company, and

(b)   

any distribution in respect of the share were not a

distribution falling within section 209(2)(a) or (b) of the Taxes

Act 1988.

(3)   

The debits and credits to be brought into account by the investing

25

company for the purposes of this Chapter as respects the share must

be determined on the basis of fair value accounting.

(4)   

No debits are to be brought into account in respect of any transaction

(or series of transactions) which (apart from the assumption in

subsection (8)(b) below) would have the effect of causing the

30

condition in paragraph (a) or (b) of subsection (7) below not to be

satisfied.

(5)   

For the purposes of this section, the cases where a share is subject to

outstanding third party obligations are those cases where—

(a)   

the share is subject to obligations of any description in

35

subsection (6) below,

(b)   

the obligations are obligations of a person other than the

investing company, and

(c)   

the obligations are yet to be discharged,

   

and where a share is subject to any such obligations, they are for the

40

purposes of this section the “third party obligations” in the case of

that share.

(6)   

The descriptions of obligation are—

(a)   

an obligation to meet unpaid calls on the share;

 

 

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Schedule 7 — Avoidance involving financial arrangements

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(b)   

an obligation (not falling within paragraph (a) above) to

make a contribution to the capital of the issuing company

that could affect the value of the share.

(7)   

In this section “interest-like investment” means a share whose nature

is such that the fair value of the share—

5

(a)   

is likely to increase at a rate which represents a return on an

investment of money at a commercial rate of interest (see

section 103(3A)), and

(b)   

is unlikely to deviate to a substantial extent from that rate of

increase.

10

   

Fluctuations in value resulting from changes in exchange rates are to

be left out of account for the purposes of paragraph (b) above.

(8)   

For the purposes of subsection (7) above, it shall be assumed —

(a)   

that any third party obligations will be met in the amounts,

and at the time, at which they are due, and

15

(b)   

that no transaction (or series of transactions) intended to

cause the condition in paragraph (a) or (b) of that subsection

not to be satisfied will be entered into.

(9)   

For the purposes of this section, the fair value of a share that is

subject to outstanding third party obligations must include the fair

20

value of the obligations.

(10)   

For the purposes of this section a company shall be treated as

continuing to hold a share notwithstanding that the share has been

transferred to another person—

(a)   

under a repo or stock lending arrangement, or

25

(b)   

under a transaction which is treated by section 26 of the

Taxation of Chargeable Gains Act 1992 as not involving any

disposal.”.

      (3)  

After section 91A insert—

“91B    

Non-qualifying shares

30

(1)   

This section applies for the purposes of corporation tax in relation to

a company if at any time in an accounting period—

(a)   

the company (“the investing company”) holds a share in

another company (“the issuing company”),

(b)   

the share is not one which, by virtue of paragraph 4 of

35

Schedule 10 to this Act (holdings in unit trusts and offshore

funds), falls to be treated for that accounting period as if it

were rights under a creditor relationship of the investing

company, and

(c)   

the share is a non-qualifying share (see subsection (6) below),

40

   

and at no time in the accounting period does section 91A above

apply in relation to the investing company in the case of that share.

(2)   

This Chapter shall have effect for that accounting period in

accordance with subsection (3) below as if—

(a)   

the share were rights under a creditor relationship of the

45

investing company, and

 

 

 
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