Finance Bill

House of Commons

Session 2005 - 06
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Finance Bill

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.
40

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Schedule 7 — Avoidance involving financial arrangements
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      (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.

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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;
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(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.

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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

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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