Finance Bill

House of Commons

Session 2005 - 06
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Finance Bill

Finance Bill
Schedule 7 — Avoidance involving financial arrangements
111

      (2)
The amendment made by this paragraph has effect where a company ceases
to be a member of a group on or after 16th March 2005.
Avoidance involving repos or stock lending
19    (1)
In Schedule 9 to FA 1996 (loan relationships) paragraph 15 is amended as
follows.
5
      (2)
At the end of sub-paragraph (2) (disposals and acquisitions to which the
paragraph applies) add “and as is, in the case of those arrangements, the
disposal or acquisition effected by—
(a)
the transfer by A to B mentioned in sub-paragraph (3)(a)
below, or
10
(b)
any transfer to A that gives effect to the entitlement or
requirement described in sub-paragraph (3)(b) below.”.
      (3)
In sub-paragraph (3) (meaning of “repo or stock-lending arrangements”)—
(a)
in paragraph (a), after “one person” insert “(“A”)” and after
“another” insert “(“B”)”;
15
(b)
in paragraph (b), for “the transferor” substitute “A”.
      (4)
In sub-paragraph (4A) (which states certain consequences of sub-paragraph
(1) for each party), omit paragraph (b) (transferee not to be regarded as a
party to the loan relationship) and the word “and” before it, and for the
words following that paragraph substitute—
20

“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)
The amendments made by this paragraph have effect in any case where the
25
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
securities where the arrangement—
30
(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
treated for the purposes of sub-paragraph (5) as if it were a transfer falling
35
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.
      (2)
After sub-paragraph (1B) insert—
40
   “(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

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Schedule 7 — Avoidance involving financial arrangements
112

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).
5
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
10
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
15
“13B(2) to (5) or”.
      (4)
In paragraph 5 (redemption to include conversion), in sub-paragraph (3),
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),
20
or
(b)
”.
      (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—
25
(a)
which is, or has at any time been, one of the separate assets
mentioned in sub-paragraph (2) below, and
(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-
30
bearing corporate security into corporate strips of the security if he
has an interest-bearing corporate security (“the converted
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
35
corporate security,
(b)
each of those separate assets satisfies condition A,
(c)
those separate assets, taken together, satisfy condition B,
and
(d)
at least one of those separate assets is not prevented from
40
being a corporate strip by sub-paragraph (9) below,

and related expressions shall be construed accordingly.
      (3)
Condition A is that the asset—
(a)
represents the right to, or

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Schedule 7 — Avoidance involving financial arrangements
113

(b)
secures,

one or more stripped payments.
      (4)
For the purposes of this paragraph, a “stripped payment” is—
(a)
the payment of, or
(b)
a payment corresponding to,
5

the whole or a part of one or more payments (whether of interest
or principal) remaining to be made under the converted corporate
security.
      (5)
Condition B is that the assets, taken together,—
(a)
represent the right to, or
10
(b)
secure,

every payment (whether of interest or principal) remaining to be
made under the converted corporate security (or payments
corresponding to every such payment).
      (6)
Where a person—
15
(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
two or more separate assets which, taken together, satisfy
condition B),
20

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.
      (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
25
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-
paragraph (7) above—
(a)
any reference in this Schedule to converting an interest-
30
bearing corporate security into corporate strips of the
security shall be construed accordingly, and
(b)
sub-paragraph (1) above (meaning of “corporate strip”)
has effect accordingly.
      (9)
An asset is not a corporate strip if it—
35
(a)
represents the right to, or
(b)
secures,

payments of, or corresponding to, a part of every payment
remaining to be made under an interest-bearing corporate security
or a corporate strip.
40
     (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
struck, be treated for the purposes of this paragraph as not being
a payment remaining to be made under the security.
45

References to payments the right to which a separate asset
represents or secures shall be construed accordingly.

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Schedule 7 — Avoidance involving financial arrangements
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Corporate strips deemed to be relevant discounted securities
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
5
amount determined in accordance with sub-paragraph (3) below.
      (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
10
TMV is the total of the market values of all the separate assets
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
15
transfer of the security, and
(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—
20
(a)
by being exchanged by any person for that security, or
(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
25
payment to that person of an amount equal to its market value.
      (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
30
acquisition of the security by the person who has it immediately
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,
35
another are references to its market value at the time of the
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,—
40
(a)
the amount paid by a person in respect of his acquisition of
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
45
strip at the time of the transfer, or

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Schedule 7 — Avoidance involving financial arrangements
115

(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
5
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
10
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
15
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.
      (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
20
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)
The market value of a corporate strip at any time shall be
determined for the purposes of this paragraph without regard to
25
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.
      (6)
For the purposes of this paragraph, no account shall be taken of
any costs incurred in connection with any transfer or redemption
30
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.
Corporate strips: manipulation of price: associated payment giving rise to CGT loss
13D   (1)
Where—
35
(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
13C(1) above,
(b)
under the scheme or arrangement, a payment falls to be
40
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
is made, a loss accrues to any person for the purposes of
capital gains tax,
45

the loss shall not be an allowable loss for the purposes of capital
gains tax.

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Schedule 7 — Avoidance involving financial arrangements
116

      (2)
For the purposes of this paragraph, a scheme or arrangement has
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—
5
(a)
the obtaining of a tax advantage by any person, or
(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.”.
10
      (6)
In paragraph 15(1) (general interpretation) insert each of the following
definitions at the appropriate place—
“ “corporate strip” has the meaning given by paragraph 13A
above;”;
“ “interest-bearing corporate security” means any interest-
15
bearing security other than—
(a)
a security issued by the government of a territory;
(b)
a share in a company;”;
“ “interest-bearing security” includes any loan stock or similar
security;”.
20
      (7)
In paragraph 15(1)—
(a)
in the definition of “relevant discounted security”, after “paragraphs
3” insert “, 13B(1)”;
(b)
in the definition of “strip”, after ““strip”” insert “, except in the
expression “corporate strip”,”.
25
      (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.
Transactions within groups: treatment of transferee company
22    (1)
In Schedule 26 to FA 2002 (derivative contracts) paragraph 28 (transactions
30
within groups) is amended as follows.
      (2)
For sub-paragraph (3) (the credits and debits to be brought into account)
substitute—
    “(3)
For the purpose of determining the credits and debits to be
brought into account for the purposes of this Schedule in respect
35
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
place, the transferor company shall be treated as having
entered into that transaction for a consideration equal to
40
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
had acquired the contract for a consideration equal to its
notional carrying value.
45

For the purposes of this sub-paragraph the notional carrying value
is the amount that would have been the carrying value of the

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Schedule 7 — Avoidance involving financial arrangements
117

derivative contract in the accounts of the transferor company if a
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—
5
““carrying value” has the same meaning as it has for the
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
10
after that date.
      (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
15
paragraph 28 of Schedule 26 to FA 2002,
(b)
the first of the series of 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,
20

by virtue of which that paragraph applies or would apply apart from
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.
25
      (2)
In sub-paragraph (1), for paragraph (b) (treatment of transferee in respect of
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
30
relevant transaction is on or after 16th March 2005.
      (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—
35
“Transferee leaving group after replacing transferor as party to derivative contract
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
40
(ii)
by virtue of sub-paragraph (2)(b) of that paragraph
(“case B”), but