Finance (No. 2) Act 2005 (c. 22)

(The document as of February, 2008)

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(b)

a life annuity, as defined in section 473(2) of ITTOIA 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 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 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 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 by a company on or after 16th March 2005.

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) 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 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 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.

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--

" (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 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,

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 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 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 corporate strip, and

(2) The loss shall not be an allowable loss.

(3) For the purposes of this section 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 section 452G of ITTOIA 2005 and this section) is--

(a) the obtaining of a tax advantage by any person, or

(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 "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. " .

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--

(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 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

(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

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 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

(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 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 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 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 subsection (6) below,

(b) the obligations are obligations of a person other than the investing company, and

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

(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--

(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.

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

(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 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

(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

(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 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

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 investing 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 company for the purposes of this Chapter as respects the share must be determined on the basis of fair value accounting.

(4) In any case where Condition 1 in section 91C below is satisfied, no debits are to be brought into account in respect of any transaction (or series of transactions) which (apart from the assumption in subsection (6) of section 91C below) would have the effect of causing the condition in paragraph (a) or (b) of subsection (1) of that section not to be satisfied.

(5) In any case where Condition 3 in section 91E below is satisfied--

(a) debits and credits shall be brought into account for the purposes of Schedule 26 to the Finance Act 2002 (derivative contracts) by the investing company in respect of any associated transaction falling within section 91E below as if it were, or were a transaction in respect of, a derivative contract (if that is not in fact the case), and

(b) those debits and credits shall be determined on the basis of fair value accounting.

(6) A share is a non-qualifying share for the purposes of this section if--

(a) it is not one where section 95 of the Taxes Act 1988 (dealers etc) applies in relation to distributions in respect of the share, and

(b) one or more of the Conditions in sections 91C to 91E below is satisfied.

(7) Subsection (10) of section 91A above (company treated as holding a share) also applies for the purposes of this section. " .

(4) After section 91B insert--

" 91C Condition 1 for section 91B(6)(b)

(1) Condition 1 is that the assets of the issuing company are of such a nature that the fair value of the share--

(a) is likely to increase at a rate which represents a return on an investment of money at a commercial rate of interest, and

(b) is unlikely to deviate to a substantial extent from that rate of increase.

Fluctuations in value resulting from changes in exchange rates are to be left out of account for the purposes of paragraph (b) above.

(2) But Condition 1 is not satisfied if the whole or substantially the whole by fair value of the assets of the issuing company are income producing.

(3) The assets which, for the purposes of this section, are "income producing" are--

(a) any share as respects which the conditions in section 91A(1) above are satisfied;

(b) any share as respects which Condition 1 above is satisfied or would, apart from subsection (2) above, be satisfied;

(c) any share as respects which Condition 2 in section 91D below is satisfied or would, apart from subsection (1)(c) of that section (excepted shares), be satisfied;

(d) any share as respects which Condition 3 in section 91E below is satisfied;

(e) any asset of a description specified in any paragraph of paragraph 8(2) of Schedule 10 to this Act (qualifying investments in relation to a unit trust scheme or an offshore fund);

(f) rights under a repo in relation to which section 730A of the Taxes Act 1988 applies;

(g) any share in a company the whole or substantially the whole by fair value of whose assets are assets within paragraphs (a) to (f) above.

(4) The Treasury may by regulations amend this section for the purpose of adding to the assets which are income producing.

(5) The provision that may be made by regulations under this section includes provision for the regulations to have effect in relation to accounting periods (whenever beginning) which end on or after the day on which the regulations come into force.

(6) For the purposes of subsection (1) above, it shall be assumed 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 by the investing company.

(7) This section shall be construed as one with section 91B above.

91D Condition 2 for section 91B(6)(b)

(1) Condition 2 is that the share--

(a) is redeemable (see subsection (2)),

(b) is designed to produce a return which equates, in substance, to the return on an investment of money at a commercial rate of interest, and

(2) For the purposes of this section, a share is to be regarded as redeemable only if it is redeemable as a result of its terms of issue (or any collateral agreements, arrangements or understandings)--

(a) requiring redemption,

(b) entitling the holder to require redemption, or

(3) A share is an "excepted share" for the purposes of this section if--

(a) it is a qualifying publicly issued share (see subsections (4) and (5)),

(b) it is a share that mirrors a public issue (see subsections (6) to (8)), or

(4) A share is a "qualifying publicly issued share" for the purposes of this section if--

(a) it was issued by a company as part of an issue of shares to independent persons, and

(b) less than 10% of the shares in that issue are held by the investing company or persons connected with it.

(5) But a share is not a qualifying publicly issued share for those purposes if the investing company's purpose in acquiring the share is an unallowable purpose by virtue of subsection (9)(a) below.

(6) The cases where a share mirrors a public issue are those set out in subsections (7) and (8) below.

(7) Case 1 is where--

(a) a company (company A) issues shares (the public issue) to independent persons,

(b) within 24 hours of that issue, one or more other companies (companies BB) issue shares (the mirroring shares) to company A on the same, or substantially the same, terms as the public issue,

(d) the total nominal value of the mirroring shares does not exceed the nominal value of the public issue,

and in any such case the mirroring shares are shares that mirror a public issue.

(8) Case 2 is where, in the circumstances of Case 1,--

(a) within 24 hours of the public issue, one or more other companies (companies CC) issue shares (the second-level mirroring shares) to one or more of companies BB on the same, or substantially the same, terms as the public issue,

(b) company A, companies BB and companies CC are associated companies, and

and in any such case the second-level mirroring shares are also shares that mirror a public issue.

(9) For the purposes of this section, a share is acquired by the investing company for an unallowable purpose if the purpose, or one of the main purposes, for which the company holds the share is--

(a) the purpose of circumventing section 95 of the Taxes Act 1988 (see subsection (10)), or

(b) any other purpose which is a tax avoidance purpose (see subsection (11)).

(10) The purpose, or one of the main purposes, for which the investing company holds a share shall, in particular, be taken to be the purpose of circumventing section 95 of the Taxes Act 1988 (taxation of dealers in respect of distributions etc) if the investing company was an associated company of a bank (see subsection (11)) at the time when the investing company acquired the share, unless the investing company shows that--

(a) immediately before that time, some or all of its business consisted in making and holding investments, and

(b) it acquired the share in the ordinary course of that business.

(11) In this section--

"associated company", in relation to any other company, means a company which, within the meaning given by section 413(3)(a) of the Taxes Act 1988, is a member of the same group of companies as that other company;
"bank" has the meaning given by section 840A of the Taxes Act 1988;
"independent person", in relation to a company, means a person who is not connected with the company;
"tax advantage" has the meaning given by section 709(1) of the Taxes Act 1988;
"tax avoidance purpose", in the case of any company, means any purpose that consists in securing a tax advantage (whether for the company or any other person).

(12) Section 839 of the Taxes Act 1988 (connected persons) applies for the purposes of this section.

(13) This section is to be construed as one with section 91B above.

91E Condition 3 for section 91B(6)(b)

(1) Condition 3 is that there is a scheme or arrangement under which the share and one or more associated transactions are together designed to produce a return which equates, in substance, to the return on an investment of money at a commercial rate of interest.

(2) But Condition 3 is not satisfied if--

(a) Condition 1 in section 91C above is satisfied as respects the share or would, apart from subsection (2) of that section (income producing assets), be so satisfied, or

(b) Condition 2 in section 91D above is satisfied as respects the share or would, apart from subsection (1)(c) of that section (excepted shares), be so satisfied.

(3) In this section "associated transaction" includes entering into, or acquiring rights or liabilities under, any of the following--

(a) a derivative contract;

(b) a contract that would be a derivative contract, apart from paragraph 4(2B) of Schedule 26 to the Finance Act 2002 (trades etc: hedging relationships with shares);

(i) a derivative contract, or

(ii) a contract falling within paragraph (b) above;

(d) a contract of insurance or indemnity.

(4) This section is to be construed as one with section 91B above. " .

(5) After section 91E insert--

" 91F Power to add, vary or remove Conditions for section 91B(6)(b)

(1) The Treasury may by regulations amend this Chapter so as to add, vary or remove Conditions for the purposes of section 91B(6)(b) above.

(2) Where the Treasury so add, vary or remove a Condition, they may also by regulations amend any of the following enactments--

(a) this Chapter,

(b) Chapters 1 to 3 of Part 6 of the Taxes Act 1988 (company distributions),

(d) the Taxation of Chargeable Gains Act 1992,

(e) Schedule 26 to the Finance Act 2002 (derivative contracts),

so as to make provision for or in connection with taxation in the case of any asset or transaction that is or was mentioned in the Condition.

(3) The power to make regulations under this section includes power--

(a) to make different provision for different cases, and

(b) to make such consequential, supplementary, incidental or transitional provisions, or savings, as appear to the Treasury to be necessary or expedient (including provision amending any enactment or any instrument made under an enactment). " .

(6) After section 91F insert--

" 91G Shares beginning or ceasing to be subject to section 91A or 91B

(1) Where at any time on or after 16th March 2005 the conditions in section 91A(1) or 91B(1) above become satisfied in the case of any share, otherwise than in the circumstances described in subsection (3) below, the investing company shall be deemed for the purposes of the Taxation of Chargeable Gains Act 1992--

(a) to have disposed of the share immediately before that time for a consideration of an amount equal to its fair value at that time, and

(b) to have immediately reacquired it for a consideration of the same amount.

(2) Where at any time the conditions in section 91A(1) or 91B(1) above cease to be satisfied in the case of any share, the investing company shall be deemed for the purposes of the Taxation of Chargeable Gains Act 1992 and of this Chapter--

(a) to have disposed of the share immediately before that time for a consideration of an amount equal to its fair value at that time, and

(b) to have immediately reacquired it for a consideration of the same amount.

(3) In any case where--

(a) a share is held by a company both--

(i) at the end of 15th March 2005, and

(ii) at the beginning of 16th March 2005, and

(b) the conditions in section 91A(1) or 91B(1) above are satisfied in relation to that share at the beginning of 16th March 2005,

subsection (4) below applies.

(4) In any such case, section 116 of the Taxation of Chargeable Gains Act 1992 (reorganisations etc involving qualifying corporate bonds) shall have effect in accordance with--

(a) the assumptions in subsections (5) and (6) below, and

(b) the provisions of subsections (7) and (8) below.

(5) The first of the assumptions is that the share became an asset representing a creditor relationship of the company (and, accordingly, a qualifying corporate bond) in consequence of the occurrence on 16th March 2005 of a transaction such as is mentioned in section 116(1) of the Taxation of Chargeable Gains Act 1992.

(6) The remaining assumptions are that, in relation to the transaction deemed to have occurred as mentioned in subsection (5) above,--

(a) the share immediately before 16th March 2005 shall be assumed to be the old asset for the purposes of section 116 of the Taxation of Chargeable Gains Act 1992, and

(b) the asset representing a creditor relationship immediately after the beginning of 16th March 2005 shall be assumed for those purposes to be the new asset.

(7) Where--

(a) subsection (3) above has effect in the case of any share, but

(b) the conditions in section 91A(1) or 91B(1) above cease to be satisfied in the case of the share at any time on or before 31st December 2005,

subsection (8) below applies.

(8) In any such case--

(a) the deemed disposal of the share at that time by virtue of subsection (2)(a) above shall not be regarded as a disposal for the purposes of subsection (10)(b) or (c) of section 116 of the Taxation of Chargeable Gains Act 1992, but

(b) the share shall continue to be the new asset for the purposes of that section. " .

(7) The amendments made by this paragraph have effect in relation to shares held by a company on or after 16th March 2005.

Related transactions in relation to right to receive manufactured interest

11 (1) Section 97 of FA 1996 (manufactured interest) is amended as follows.

(2) In subsection (2) (consequences of company having relationship to which the section applies)--

(a) paragraph (b) (which restricts the debits and credits to be brought into account to those relating to the manufactured interest) shall cease to have effect, and

(b) in the closing words, for "paragraphs (a)(ii) and (b)" substitute "paragraph (a)(ii)".

(3) After subsection (2) insert--

" (2A) Where a company--

(a) has a relationship to which this section applies, but

(b) enters into a related transaction in respect of the right to receive manufactured interest,

then, for the purpose of bringing credits into account by virtue of subsection (2) above in respect of that or any other related transaction, the company shall continue to be treated as having a relationship to which this section applies even though the manufactured interest is not payable to the company. " .

(4) Omit subsections (3) and (3A) (which relate to whether debits or credits are trading or non-trading etc and which are unnecessary, in view of the application of sections 82(2) and 103(2) of FA 1996 by virtue of section 97(2) of that Act).

(5) The amendments made by this paragraph have effect in relation to related transactions on or after 16th March 2005.

Money debts etc not arising from lending of money: discounts and profits from transactions

12 (1) Section 100 of FA 1996 (money debts etc not arising from the lending of money) is amended as follows.

(2) In subsection (1)(c) (money debts to which the section applies) after sub-paragraph (iii) insert " or

(iv) as respects which the conditions in subsection (1A) below (discount etc) are satisfied; " .

(3) After subsection (1) insert--

" (1A) The conditions mentioned in subsection (1)(c)(iv) above are that--

(a) the company stands in the position of creditor in relation to the money debt;

(b) the money debt is one from which a discount (whether of an income or capital nature) arises to the company;

(c) the discount does not fall to be brought into account under section 50 of the Finance Act 2005 by virtue of section 47 of that Act (alternative finance return);

(d) if the money debt is some or all of the consideration payable for a disposal of property, the money debt (on the assumption that it will be paid in full) does not fall to be brought into account for the purposes of corporation tax as a trading receipt of the company;

(e) if the money debt is some or all of the consideration payable for a disposal of property, the property in question is not any of the following--

(i) an asset representing a loan relationship;

(ii) a derivative contract. " .

(4) In subsection (2), as it has effect for periods of account beginning on or after 1st January 2005, in paragraph (a), for "matters mentioned in subsection (1)(c) above" substitute "matters mentioned in subsection (1)(c)(i) to (iii) above or subsection (2ZA) below".

(5) After subsection (2) insert--

" (2ZA) The matters are--

(a) in the case of a money debt falling within subsection (1)(c)(i) above, profits (but not losses) arising to the company from any related transaction in respect of the right to receive interest;

(b) in the case of a money debt falling within subsection (1)(c)(iv) above, each of the following--

(i) the discount arising to the company from the money debt;

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