Finance Act 1985

Section 46.

SCHEDULE 11 Deep Discount Securities

Introduction

1 (1) This sub-paragraph applies to deep discount securities issued by a company where one or both of the following applies—

(a) immediately before the issue the assets held by the company included relevant securities with a value equal to at least 75 per cent, of the value of all the assets held by it;

(b) the terms of issue of the deep discount securities are determined by the company by reference to (though not necessarily in such a way that they reflect) the terms of issue of relevant securities which are held by the company when the deep discount securities are issued or which it intends to acquire later.

(2) This sub-paragraph applies to deep discount securities issued by a company where—

(a) sub-paragraph (1) above would apply if the references to relevant securities included references to United Kingdom corporate bonds, and

(b) the company acquired those bonds on or after their issue (by another company) in circumstances where sub-paragraph (1) above would have applied if they had been deep discount securities.

(3) This sub-paragraph applies to deep discount securities of a particular kind issued by a company and in the case of which—

(a) neither of the preceding sub-paragraphs applies, and

(b) at any time in the first income period of the securities of that kind the assets held by the company include relevant securities with a value equal to at least 75 per cent, of the value of all the assets held by it.

(4) This sub-paragraph applies to deep discount securities issued by a company where either—

(a) they are issued on a conversion to which section 82 of the [1979 c. 14.] Capital Gains Tax Act 1979 applies of old securities, or

(b) they are issued by a company in exchange for old securities in circumstances in which section 85(3) of that Act applies or are treated as so issued by virtue of section 86(1) of that Act,

and in this sub-paragraph "old securities" means deep discount securities to which sub-paragraph (1), (2) or (3) above or this subparagraph applies, except that securities to which sub-paragraph (3) above applies are not old securities unless sub-paragraph (3)(b) has been fulfilled in their case by the time the conversion or exchange concerned takes place.

(5) In the following provisions of this Schedule " chargeable security " means a deep discount security to which any of the preceding sub-paragraphs applies.

(6) In this paragraph—

• " deep discount securities " has the same meaning as in section 36 of the [1984 c. 43.] Finance Act 1984,

• " income period " has the meaning given by paragraph 1(7) of Schedule 9 to that Act,

• " issued " shall be construed in accordance with section 36(4) of that Act,

• "relevant securities" means securities within the meaning of Chapter IV of this Part of this Act, but excluding United Kingdom corporate bonds,

• "terms of issue" includes terms relating to amounts payable on redemption or by way of interest, or to times of payment of such amounts, and

• "value" in relation to assets means the price they might reasonably be expected to fetch on a sale in the open market.

(7) For the purposes of this paragraph a company holds assets if it has a beneficial interest in them and acquires them if it acquires inch an interest in them.

(8) For the purposes of this paragraph securities are of the same kind if they are treated as being of the same kind by the practice of a stock exchange, or would be so treated if dealt with on a stock exchange.

(9) In this paragraph " United Kingdom corporate bonds " means securities—

(a) issued by a company resident in the United Kingdom at the time of issue,

(b) the debt on which represents and has at all times represented a normal commercial loan, as denned in paragraph 1(5) of Schedule 12 to the [1973 c. 51.] Finance Act 1973, and

(c) which are expressed in sterling and in respect of which no provision is made for conversion into, or redemption in, a currency other than sterling.

(10) For the purposes of sub-paragraph (9)(c) above—

(a) a security shall not be regarded as expressed in sterling if the amount of sterling falls to be determined by reference to the value at any time of any other currency or asset; and

(b) a provision for redemption in a currency other than sterling but at the rate of exchange prevailing at redemption shall be disregarded.

The charge

2 (1) Where a person acquires a chargeable security, the chargeable amount shall be treated as income chargeable to tax under Case III or (as the case may be) Case IV of Schedule D on each of the following occasions—

(a) the end of each income period to fall within the period of ownership;

(b) the end of any income period which ends but does not begin in the period of ownership.

(2) In sub-paragraph (1) above " the chargeable amount" means—

(a) where paragraph (a) applies, an amount equal to the income element for the income period;

(b) where paragraph (6) applies, an amount equal to the income element for the part of the income period falling within the period of ownership.

(3) The income chargeable shall (notwithstanding anything in sections 119 to 121 or, as the case may be, 122 to 124 of the Taxes Act) be taken into account in computing tax charged for the year of assessment in which the occasion concerned occurs.

(4) Where the person disposes of the security, or paragraph 8(2)(a) of Schedule 9 to the [1984 c. 43.] Finance Act 1984 treats him as disposing of it, any amount (or the aggregate of any amounts) treated as income by virtue of this paragraph shall be deducted from the income chargeable by virtue of paragraph 1(1)(a) of that Schedule.

(5) Paragraph 8(3) of that Schedule shall not apply in the case of a chargeable security which is converted or exchanged.

(6) Sub-paragraph (4) above shall not affect the references in paragraphs 1(1)(c) and 9 of that Schedule to the amount mentioned in paragraph 1(1)(a) of that Schedule; and the references in paragraph 8(2)(b) and (c) of that Schedule to the amount on which he is chargeable shall be construed as references to the amount on which he would be chargeable apart from sub-paragraph (4) above.

(7) Where an amount is (or amounts are) treated as income by virtue of this paragraph, then, in arriving at the accrued income attributable to the period between the person's acquisition and redemption for the purposes of paragraph 7(2) of that Schedule, that amount (or the aggregate of those amounts) shall be deducted from such income found under paragraph 7(2) apart from this sub-paragraph.

(8) Section 360(2) of the Taxes Act (exemption for charities from tax on chargeable gains) shall apply in relation to tax chargeable by virtue of this paragraph as it applies in relation to tax on chargeable gains.

(9) In this paragraph, expressions which are also used in paragraph 1 of Schedule 9 to the Finance Act 1984 have the same meanings as in that paragraph.

Information

3 Every company which issues a chargeable security to which paragraph 1(1), (2) or (4) above applies shall cause to be shown on fee certificate of each such security the fact that tax is chargeable under this Schedule.

Minor amendment

4 In paragraph 1(7) of Schedule 9 to the [1984 c. 43.] Finance Act 1984, in paragraph (b) of the definition of " income period ", after " begins on " there shall be inserted " the issue or on".