Finance Act 1986

Section 40.

SCHEDULE 9 Business Expansion Scheme

PART I Amendment of Schedule 5 to Finance Act 1983

1 (1) Schedule 5 to the [1983 c. 28.] Finance Act 1983 shall be amended as follows.

(2) Except where different provision is made by this Schedule, the amendments made by this Schedule have effect in relation to snares issued at any time after 18th March 1986.

Relevant period

2 In paragraph 2(7)(b), after "5" there shall be inserted "5A, 5B, 5C".

Research and development companies

3 In paragraph 2A—

(a) in sub-paragraph (1)(a), for the words from "from" to the end there shall be substituted the words "to be carried on by the company or by any subsidiary of the company and from which it is intended that a qualifying trade (to be so carried on) will be derived; or";

(b) in sub-paragraph (2) for the words from "at the time" to "by it; or" there shall be substituted the words "by the company or by any subsidiary of the company on the date on which the shares are issued, or begins so to be carried on immediately thereafter, and from which it is intended that a qualifying trade (to be so carried on) will be derived; or";

(c) in sub-paragraph (3), after the word "company" there shall be inserted the words "or (as the case may be) subsidiary"; and

(d) in sub-paragraph (4), the words "and the words 'by the company' shall be omitted" shall be added at the end.

4 (1) After paragraph 2A there shall be inserted the following paragraph—

“Modification of paragraph 2 in relation to oil exploration

2B (1) Where eligible shares in a company are issued for the purpose of enabling the company to raise money for oil exploration—

(a) to be carried on by the company, or by any subsidiary of the company; and

(b) from which it is intended that a qualifying trade (to be so carried on) will be derived;

paragraph 2 above shall apply in relation to the company with the modifications set out in this paragraph.

(2) For paragraph (b) of sub-paragraph (1) there shall be substituted the following paragraphs—

‘(b) those shares are issued to him for the purpose of raising money for oil exploration which—

(i) is being carried on by the company, or by any subsidiary of the company, on the date on which the shares are issued; or

(ii) begins so to be carried on immediately thereafter;

and from which it is intended that a qualifying trade (to be so carried on) will be derived;

(c) throughout the period of three years beginning with that date, the company, or any subsidiary of the company, holds an exploration licence which was granted to it, or to another such subsidiary;

(d) the exploration is carried out solely within the area to which the licence applies; and

(e) on the date on which the shares are issued, neither the company nor any subsidiary of the company holds an appraisal licence or a development licence relating to that area or any part of that area.’

(3) After sub-paragraph (1) there shall be inserted the following sub-paragraph—

‘(1A) Where, at any time after the issue of the shares, but before the end of the period mentioned in paragraph (c) of sub-paragraph (2) above, the company, or any subsidiary of the company, comes to hold an appraisal licence or development licence which relates to the area, or any part of the area, to which the exploration licence relates, the exploration licence and that other licence shall be treated for the purposes of that paragraph as a single exploration licence.’

(4) For sub-paragraph (4) there shall be substituted the following sub-paragraph—

‘(4) The relief shall be given on a claim and shall not be allowed unless and until the company has carried on the exploration for four months’.

(5) In sub-paragraph (5), for the word 'trade' there shall be substituted the word 'exploration'.

(6) In sub-paragraph (7)(b), for the words from 'either' to the end there shall be substituted the words 'three years after that date'.

(7) A trade which consists to any substantial extent of oil extraction activities shall, if it would be a qualifying trade were it not for paragraph 6(2)(d) below, be treated as a qualifying trade for the purposes of this paragraph (including those of paragraph 2(1)(b) as modified).”

(2) This paragraph has effect in relation to shares issued at any time after the passing of" this Act.

Individuals qualifying for relief

5 (1) In paragraph 4, the following sub-paragraph shall be added at the end—

“(5) An individual who is at any time performing duties which are treated by virtue of section 184(3)(a) of the Taxes Act (Crown employees serving overseas) as performed in the United Kingdom shall be treated, for the purposes of this paragraph, as resident and ordinarily resident in the United Kingdom at that time.”

(2) This paragraph shall have effect in relation to shares issued on or after 6th April 1986.

Qualifying companies

6 (1) Paragraph 5 shall be amended as follows.

(2) In sub-paragraph (1) the words "Subject to paragraph 5A below" shall be inserted at the beginning.

(3) After sub-paragraph (3) there shall be inserted the following subparagraph—

“(3A) Where a company has one or more qualifying subsidiaries, it shall not be a qualifying company if the qualifying trade or trades carried on by the company and its subsidiaries, taken as a whole, are not carried out wholly or mainly in the United Kingdom”.

(4) Sub-paragraphs (8) to (11) shall cease to have effect.

7 The following paragraphs shall be inserted after paragraph 5—

“5A (1) Subject to paragraph 5C below, a company is not a qualifying company if at any time during the relevant period—

(a) the value of the interests in land held by the company at that time; or

(b) where lower, the value of the interests in land which were held by the company immediately after the issue of the shares (adjusted in accordance with paragraph 5B below);

is greater than half the value of the company's assets as a whole.

(2) For the purposes of this paragraph, the value of the interests in land held by a company on any date shall be arrived at by first aggregating the market value on that date of each of those interests and then deducting—

(a) the amount of any debts of the company which are secured on any of those interests (including any debt secured by a floating charge on property which comprises any of those interests);

(b) the amount of any unsecured debts of the company which do not fall due for payment before the expiry of the period of twelve months beginning with that date; and

(c) the amount paid up in respect of those shares of the company (if any) which carry a present or future preferential right to the company's assets on its winding up.

(3) For the purposes of this paragraph, the value of a company's assets as a whole shall be arrived at by first aggregating the market value of each of those assets and then deducting the amount of the debts and liabilities of the company.

(4) For the purposes of sub-paragraph (3) above, the amount paid up in respect of those shares of a company (if any) which carry a present or future preferential right to the company's assets on its winding up shall be treated as a debt of the company, but otherwise a company's share capital, share premium account and reserves shall not be treated for those purposes as debts or liabilities of the company.

(5) In this paragraph "interest in land" means any estate or interest in land, any right in or over land or affecting the use or disposition of land, and any right to obtain such an estate, interest or right from another which is conditional on that other's ability to grant the estate, interest or right in question, except that it does not include—

(a) the interest of a creditor (other than a creditor in respect of a rentcharge) whose debt is secured by a mortgage, an agreement for a mortgage or a charge of any kind over land; or

(b) in Scotland, the interest of a creditor in a charge or security of any kind over land.

(6) In arriving at the value of any interest in land for the purposes of this paragraph—

(a) it shall be assumed that there is no source of mineral deposits in the land of a kind which it would be practicable to exploit by extracting them from underground otherwise than by means of opencast mining or quarrying; and

(b) any borehole on the land shall be disregarded if it was made in the course of oil exploration.

(7) Where a company is a member of a partnership which holds any interest in land—

(a) that interest shall, for the purposes of this paragraph and paragraphs 5B and 5C below, be treated as an interest in land held by the company; but

(b) its value at any time shall, for those purposes, be taken to be such fraction of its value (apart from this subparagraph) as is equal to the fraction of the assets of the partnership to which the company would be entitled if the partnership were dissolved at that time.

(8) Where a qualifying company has one or more subsidiaries, the company and its subsidiaries ("the group") shall be treated as a single company for the purposes of this paragraph and paragraphs 5B and 5C below; but any debt owed by, or liability of, one member of the group to another shall be disregarded for those purposes.

(9) The Treasury may by order made by statutory instrument amend sub-paragraph (1) above by substituting a different fraction for the fraction for the time being specified there; and any such order shall be subject to annulment in pursuance of a resolution of the Commons House of Parliament.

(10) Where a company has ceased to be a qualifying company in consequence of the operation of this paragraph, section 62(6) of Chapter II shall apply as if the relief was withdrawn in consequence of an event which occurred at the time when the company so ceased to be a qualifying company.

5B (1) For the purposes of paragraph 5A(1)(b) above, the value of the interests in land held by a company immediately after the issue of the shares in question ("the original interests") shall be adjusted by—

(a) adding—

(i) the cost of any interests in land subsequently acquired by the company ("the later interests"); and

(ii) any expenditure (whenever payable) incurred by the company wholly and exclusively in enhancing the value of any of the original or later interests;

(b) deducting any consideration for the disposal by the company of any of the original or later interests or for the grant by the company of any interest in land out of any of those interests; and

(c) deducting any consideration otherwise derived by the company from its ownership of any of the original or later interests.

(2) Any sum which is received by a company by way of rent, or which is attributable to the use of any premises by the company, shall be disregarded for the purposes of sub-paragraph (1)(c) above.

(3) For the purposes of this paragraph—

(a) the cost of an interest in land acquired by a company shall be taken to be the amount or value of the consideration given by the company, or on its behalf, wholly and exclusively for the acquisition of the interest;

(b) consideration shall be brought into account without any discount for the postponement of the right to receive any part of it; and

(c) the grant of an interest in land out of any of the original interests shall be treated as a disposal of the original interest in question.

(4) Where—

(a) the interest of a company as lessee under a lease ("the lease") falls to be valued at any time for the purposes of paragraph 5A above or the cost of acquiring that interest falls to be calculated for the purposes of this paragraph; and

(b) the aggregate amount of the rent payable by the lessee under the lease before the end of the relevant period exceeds that which would be so payable under a lease of the premises at a full market rent (but otherwise on the same terms and conditions as the lease);

the value of the company's interest at that time shall be calculated on the assumption that the aggregate amount payable as mentioned in paragraph (b) above is a nominal amount and, where the interest was acquired after the issue of the shares in question, it shall be assumed that the company paid the appropriate premium when acquiring the interest.

(5) In determining, for the purposes of this paragraph, the consideration for the disposal or acquisition of an interest in land, no account shall be taken in the first instance of any contingent liability assumed by the company or by any other person.

(6) If it is subsequently shown to the satisfaction of the Board that a contingent liability which was not taken into account in determining the consideration for a disposal or acquisition has become enforceable and is being or has been enforced, such adjustment, whether by way of a further assessment or the discharge or repayment of tax or otherwise, shall be made as is required in consequence.

(7) Where the relief obtainable under sub-paragraph (6) above requires a discharge or repayment of tax, it shall be given on a claim to the Board and such a claim may be made at any time.

5C (1) Where a company raises any amount through the issue of eligible shares, paragraph 5A above—

(a) shall not have effect to deny relief in relation to those shares if the aggregate of that amount and of all other amounts (if any) so raised within the period of twelve months ending with the date of that issue does not exceed £50,000; and

(b) where that aggregate exceeds £50,000, shall have effect to deny relief only in relation to the excess.

(2) Where—

(a) at any time within the relevant period, the company in question or any of its subsidiaries carries on any trade or part of a trade in partnership, or as a party to a joint venture, with one or more other persons; and

(b) that other person, or at least one of those other persons, is a company;

the reference to £50,000, both in sub-paragraph (1)(a) and (1)(b) above, shall have effect as if it were a reference to—

"A" being the total number of companies (apart from the company in question or any of its subsidiaries) which are members of any such partnership or parties to any such joint venture during the relevant period.

(3) Where paragraph 5A, as read with this paragraph, requires a restriction to be placed on the relief given on claims in respect of shares issued to two or more individuals, the available relief shall be divided between them in proportion to the amounts which have been respectively subscribed by them for the shares to which their claims relate and which would, apart from the restriction, be eligible for the relief.

(4) A claimant who is dissatisfied with the manner in which the available relief is divided under this paragraph between him and any other claimant or claimants may apply to the appropriate Commissioners who shall, after giving the other claimant or claimants an opportunity to appear and be heard or to make representations in writing, determine the question for all the claimants in the same way as an appeal.

(5) In this paragraph "the appropriate Commissioners" means—

(a) in a case where the same body of General Commissioners has jurisdiction with respect to all the claimants, those Commissioners, unless all the claimants agree that the question should be determined by the Special Commissioners;

(b) in a case where different bodies of General Commissioners have jurisdiction with respect to the claimants, such of those bodies as the Board may direct, unless all the claimants agree that the question should be determined by the Special Commissioners; and

(c) in any other case, the Special Commissioners.

(6) In calculating the aggregate mentioned in sub-paragraph (1)(a) above in respect of any period of twelve months which begins on or before 18th March 1986, any amount raised by the issue of eligible shares on or before that date shall be disregarded.”

Qualifying trades

8 (1) Paragraph 6 shall be amended as follows.

(2) For sub-paragraph (2) there shall be substituted the following sub-paragraph—

“(2) The trade must not at any time in the relevant period consist of one or more of the following activities if that activity amounts, or those activities when taken together amount, to a substantial part of the trade—

(a) dealing in commodities, shares, securities, land or futures;

(b) dealing in goods otherwise than in the course of an ordinary trade of wholesale or retail distribution;

(c) banking, insurance, money-lending, debt-factoring, hire-purchase financing or other financial activities;

(d) oil extraction activities;

(e) leasing (including letting ships on charter or other assets on hire) or receiving royalties or licence fees;

(f) providing legal or accountancy services; or

(g) providing services or facilities for any trade carried on by another person which consists to any substantial extent of activities within any of paragraphs (a) to (f) above and in which a controlling interest is held by a person who also has a controlling interest in the trade carried on by the company.”

(3) For sub-paragraph (2B) there shall be substituted the following sub-paragraphs—

“(2B) A trade shall not be treated as failing to comply with this paragraph by reason only of its consisting of letting ships, other than oil rigs or pleasure craft, on charter if—

(a) every ship let on charter by the company carrying on the trade is beneficially owned by the company;

(b) every ship beneficially owned by the company is registered in the United Kingdom;

(c) throughout the relevant period the company is solely responsible for arranging the marketing of the services of its ships; and

(d) the conditions mentioned in sub-paragraph (2C) below are satisfied in relation to every letting on charter by the company,

but where any of the requirements mentioned in paragraphs (a) to (d) above are not satisfied in relation to any lettings of such ships, the trade shall not thereby be treated as failing to comply with this paragraph if those lettings and any other activity of a kind falling within paragraph 6(2) above do not, when taken together, amount to a substantial part of the trade.

(2C) The conditions are that—

(a) the letting is for a period not exceeding twelve months and no provision is made at any time (whether in the lease or otherwise) for extending it beyond that period otherwise than at the option of the lessee;

(b) during the period of the letting there is no provision in force (whether made in the lease or otherwise) for the grant of a new letting to end, otherwise than at the option of the lessee, more than twelve months after that provision is made;

(c) the letting is by way of a bargain made at arm's length between the company and a person who is not connected with it;

(d) under the terms of the charter the company is responsible as principal—

(i) for taking, throughout the period of the charter, management decisions in relation to the ship, other than those of a kind generally regarded by persons engaged in trade of the kind in question as matters of husbandry; and

(ii) for defraying all expenses in connection with the ship throughout that period, or substantially all such expenses, other than those directly incidental to a particular voyage or to the employment of the ship during that period; and

(e) no arrangements exist by virtue of which a person other than the company may be appointed to be responsible for the matters mentioned in paragraph (d) above on behalf of the company;

but this sub-paragraph shall have effect, in relation to any letting between the company in question and its subsidiary, or between it and another company of which it is a subsidiary or between it and a company which is a subsidiary of the same company of which it is a subsidiary, as if paragraph (c) were omitted.”

(4) For sub-paragraph (4) there shall be substituted the following sub-paragraphs—

“(4) For the purposes of sub-paragraph (2)(b) above—

(a) a trade of wholesale distribution is one in which the goods are offered for sale and sold to persons for resale by them, or for processing and resale by them, to members of the general public for their use or consumption;

(b) a trade of retail distribution is one in which the goods are offered for sale and sold to members of the general public for their use or consumption;

(c) a trade is not an ordinary trade of wholesale or retail distribution if—

(i) it consists to a substantial extent of dealing in goods of a kind which are collected or held as an investment or of that activity and any other activity of a kind falling within paragraph 6(2) above, taken together; and

(ii) a substantial proportion of those goods are held by the company for a period which is significantly longer than the period for which a vendor would reasonably be expected to hold them while endeavouring to dispose of them at their market value;

and, in determining for the purposes of sub-paragraph (2)(b) whether a trade is an ordinary trade of wholesale or retail distribution, regard shall be had to the extent to which it has the features mentioned in Schedule 11 to the [1981 c. 35.] Finance Act 1981, those in Part I being regarded as indications that the trade is such an ordinary trade and those in Part II being regarded as indications of the contrary.

(5) For the purposes of this paragraph a person has a controlling interest in a trade—

(a) in the case of a trade carried on by a company if—

(i) he controls the company;

(ii) the company is a close company for the purposes of the Corporation Tax Acts and he or an associate of his is a director of the company and the beneficial owner of, or able directly or through the medium of other companies or by any other indirect means to control, more than 30 per cent, of the ordinary share capital of the company; or

(iii) not less than half of the trade could, in accordance with section 253(2) of the Taxes Act, be regarded as belonging to him;

(b) in any other case, if he is entitled to not less than half of the assets used for, or the income arising from, the trade.

(6) For the purposes of sub-paragraph (5) above there shall be attributed to any person any rights or powers of any other person who is an associate of his.

(7) References in this paragraph to a trade shall be construed without regard to so much of the definition of "trade" in section 526 (5) of the Taxes Act as relates to adventures or concerns in the nature of trade; but the foregoing provisions do not affect the construction of references in sub-paragraph (2)(g) or (5) above to a trade carried on by a person other than the company and those references shall be construed as including references to any business, profession or vocation.

(8) The Treasury may by order made by statutory instrument amend this paragraph in such manner as they consider expedient.

(9) Any order under sub-paragraph (8) above shall be subject to annulment in pursuance of a resolution of the Commons House of Parliament.

(10) In this paragraph—

• "film" means an original master negative of a film, an original master film disc or an original master film tape;

• "oil rig" means any ship which is an offshore installation for the purposes of the [1971 c. 61.] Mineral Workings (Offshore Installations) Act 1971;

• "pleasure craft" means any ship of a kind primarily used for sport or recreation; and

• "sound recording" means, in relation to a film, its sound track, original master audio disc or, as the case may be, original master audio tape.”

(5) Sub-paragraph (2) above, so far as it relates to oil extraction, has effect in relation to shares issued at any time after the passing of this Act.

Disposal of shares

9 (1) Paragraph 7 shall be amended as follows.

(2) The following sub-paragraph shall be inserted after sub-paragraph (1)—

“(1A) Where an option, the exercise of which would bind the grantor to purchase any shares, is granted to an individual during the relevant period, the individual shall not be entitled to any relief in respect of the shares to which the option relates.”

(3) In sub-paragraph (2), for the words "company shall" there shall be substituted the words "company, and any option of the kind mentioned in sub-paragraph (1A) above, shall",

and after the word "given", in each place, there shall be inserted the words "(and not withdrawn)".

(4) In sub-paragraph (2A) the words "(and not withdrawn)" shall be inserted after the word "given" and the words "(subject to subparagraph (2) above)" shall be inserted after the words "class shall".

(5) The following sub-paragraph shall be substituted for sub-paragraph (4)—

“(4) For the purposes of this paragraph and of Chapter II as applied by this paragraph—

(a) references to a disposal of shares include references to the grant of an option the exercise of which would bind the grantor to sell the shares; and

(b) shares in a company shall not be treated as being of the same class unless they would be so treated if dealt with on The Stock Exchange.”

(6) The amendment made by sub-paragraph (4) above, which is enacted for the avoidance of doubt, shall be deemed to have been incorporated in Schedule 5 to the [1983 c. 28.] Finance Act 1983 as originally enacted but otherwise this paragraph has effect in relation to options granted at any time after 18th March 1986.

Value received from company

10 (1) Paragraph 8 shall be amended as follows.

(2) In sub-paragraph (1), the words "Subject to paragraph 7 above" shall be inserted at the beginning.

(3) For sub-paragraph (2) there shall be substituted the following sub-paragraph—

“(2) Subject to sub-paragraph (3) below, section 58(2) to (4) and (6) to (9) of Chapter II shall apply but—

(a) with the addition, at the end of subsection (2)(e), of the words 'which has not been repaid in full before the issue of the shares in respect of which relief is claimed';

(b) with the substitution, in subsection (3), of a reference to paragraph 5(5) above for the reference to section 55(5); and

(c) with the addition, at the end of subsection (4)(c), of the words 'reduced by the amount of any repayment made before the issue of the shares in respect of which relief is claimed'.”

(4) The following sub-paragraph shall be added at the end—

“(4) Where relief to which an individual is entitled in respect of eligible shares is reduced by virtue of this paragraph, effect shall be given to the reduction by apportioning it, as between the eligible shares held by him, in such a way as appears to the inspector, or on an appeal to the Commissioners concerned, to be just and reasonable.”

(5) The amendment made by sub-paragraph (2) above, which is enacted for the avoidance of doubt, shall be deemed to have been incorporated in Schedule 5 to the Finance Act 1983 as originally enacted.

Value received by persons other than claimants

11 (1) Paragraph 10 shall be amended as follows.

(2) In sub-paragraph (1)(b), after "thereby" there shall be inserted the words "withdrawn or reduced by virtue of paragraph 7 above or".

(3) For sub-paragraph (5A) there shall be substituted the following sub-paragraph—

“(5A) Where relief to which an individual is entitled in respect of eligible shares is reduced by virtue of this paragraph, effect shall be given to the reduction by apportioning it as between the eligible shares held by him in such a way as appears to the inspector, or on an appeal to the Commissioners concerned, to be just and reasonable.”.

Parallel trades

12 After paragraph 10 there shall be inserted the following paragraph—

“Parallel trades

10A (1) An individual is not entitled to relief in respect of any shares in a company where, at the date mentioned in subparagraph (2) below—

(a) he is one of a group of persons—

(i) who control the company; or

(ii) to whom belongs an interest amounting in the aggregate to more than a half share in the trade carried on by the company;

(b) he is also an individual, or one of a group of persons—

(i) controlling another company; or

(ii) to whom belongs an interest amounting in the aggregate to more than a half-share in another trade; and

(c) the trade carried on by the company, or a substantial part of it—

(i) is concerned with the same or similar types of property or parts thereof or provides the same or similar services or facilities; and

(ii) serves substantially the same or similar outlets or markets;

as the other trade or (as the case may be) the trade carried on by the other company.

(2) The date mentioned in sub-paragraph (1) above is—

(a) the date on which the shares are issued; or

(b) if later, the date on which the company begins to carry on the trade.

(3) For the purposes of sub-paragraph (1) above—

(a) the persons to whom a trade belongs, and (where a trade belongs to two or more persons) their respective shares in that trade, shall be determined in accordance with subsections (1)(a) and (b), (2) and (3) of section 253 of the Taxes Act; and

(b) any interest, rights or powers of a person who is an associate (as denned by section 67(1) of Chapter II) of another person shall be treated as those of that other person.

(4) For the purposes of this paragraph—

(a) references to a company's trade include references to the trade of any of its subsidiaries; and

(b) "trade", in the expressions "another trade", "other trade" and "trade carried on by the other company", includes any business, profession or vocation.”

Claims

13 In paragraph 13, the following sub-paragraph shall be added at the end—

“(10) For the purposes of the provisions of the Taxes Management Act 1970 relating to appeals against decisions on claims, the refusal of the inspector to authorise the issue of a certificate under sub-paragraph (2) above shall be taken to be a decision refusing a claim made by the company.”

Assessments for withdrawing relief

14 In paragraph 14(2)(a), for the words "or 10(1)" there shall be substituted the words "10(1) or 16A".

Information

15 (1) After paragraph 15 there shall be inserted the following paragraph—

“15A (1) Where—

(a) a company has issued a certificate under paragraph 13(2) above in respect of any eligible shares in the company; and

(b) it appears to the company, or to any person connected with the company who has knowledge of the matter, that paragraph 5A above may have effect to deny relief in respect of those shares;

the company or (as the case may be) that person or (where it so appears to each of them) both the company and that person shall give notice in writing to the inspector setting out the particulars of the case.

(2) If the inspector has reason to believe that a person has not given a notice which he is required to give under sub-paragraph (1) above, the inspector may by notice in writing require that person to furnish him within such time (not being less than sixty days) as may be specified in the notice with such information relating to the case as the inspector may reasonably require for the purposes of this Part.”

Capital gains tax

16 (1) Paragraph 16 shall be amended as follows.

(2) For sub-paragraph (1) there shall be substituted the following sub-paragraph—

“(1) Where—

(a) an individual to whom relief has been given in respect of eligible shares disposes of those shares (within the meaning of the [1979 c. 14.] Capital Gains Tax Act 1979); and

(b) the relief is not withdrawn;

any gain or loss which accrues to him on that disposal shall not be a chargeable gain or (as the case may be) allowable loss for the purposes of capital gains tax.”

(3) In sub-paragraph (3) after the word "given" in both places, there shall be inserted the words "(and not withdrawn)".

(4) After sub-paragraph (3) there shall be inserted the following subparagraphs—

“(3A) Where section 44 of the Act of 1979 (disposals between husband and wife to be on a no gain/no loss basis) has applied to any eligible shares disposed of by an individual to his or her spouse ("the transferee"), sub-paragraph (1) above shall apply in relation to the subsequent disposal of the shares by the transferee to a third party.

(3B) Where section 85 (exchange of securities for those in another company) or 86 (reconstruction or amalgamation involving issue of securities) of the Act of 1979 would, but for this subparagraph, apply in relation to eligible shares in respect of which an individual has been given relief, that section shall apply only if the relief is withdrawn.”

Reorganisation of share capital

17 (1) After paragraph 16 there shall be inserted the following paragraph—

“Reorganisation of share capital

16A (1) Where shares in respect of which relief has been given and not withdrawn have by virtue of any such allotment, otherwise than for payment, as is mentioned in section 77(2)(a) of the [1979 c. 14.] Capital Gains Tax Act 1979 fallen to be treated under section 78 of that Act as the same asset as a new holding—

(a) a disposal of the whole or part of the new holding shall be treated for the purposes of this Schedule as a disposal of the whole or a corresponding part of those shares; and

(b) the new holding shall be treated for the purposes of paragraph 7(2) above as shares in respect of which relief has been given and not withdrawn.

(2) Sections 78 to 81 of the Act of 1979 shall not apply in relation to any ordinary shares in respect of which relief has been given if—

(a) there is, by virtue of any such allotment for payment as is mentioned in section 77(2)(a) of that Act, a reorganisation affecting those shares; and

(b) immediately following the reorganisation, the relief has not been withdrawn in respect of those shares or relief has been given in respect of the allotted shares and not withdrawn.

(3) Where—

(a) any such reorganisation as is mentioned in sub-paragraph (2) above affects ordinary shares in respect of which relief has been given;

(b) immediately before the reorganisation the relief had not been withdrawn; and

(c) the amount of relief (or, where the relief has been reduced, the amount remaining) and the market value of the shares immediately before the reorganisation, exceeds their market value immediately after the reorganisation;

the relief shall be reduced by an amount equal to whichever is the smaller of those excesses.

(4) Sub-paragraph (3) above shall also apply where—

(a) an individual who has received, or become entitled to receive, in respect of any ordinary shares in a company, a provisional allotment of shares in or debentures of the company disposes of his rights; and

(b) sub-paragraph (3) would have applied (apart from this sub-paragraph) had those rights not been disposed of but an allotment of shares or debentures made to him.

(5) Where relief is reduced by virtue of sub-paragraph (3) above—

(a) the sums allowable as deductions from the consideration in the computation, for the purposes of capital gains tax, of the gain or loss accruing to an individual on the disposal of any of the allotted shares or debentures shall be taken to include the amount of the reduction, apportioned between the allotted shares or (as the case may be) debentures in such a way as appears to the inspector, or on appeal to the Commissioners concerned, to be just and reasonable; and

(b) the sums so allowable on the disposal (in circumstances in which paragraph 16 above does not apply) of any of the shares referred to in sub-paragraph (3)(a) above shall be taken to be reduced by the amount mentioned in paragraph (a) above, similarly apportioned between those shares.”.

(2) Sub-paragraphs (1) to (3) of the inserted paragraph 16A have effect in relation to reorganisations occurring at any time after 18th March 1986 and sub-paragraph (5) of that paragraph has effect in relation to disposals made at any time after that date.

Application to subsidiaries

18 For sub-paragraph (1) of paragraph 17 there shall be substituted the following sub-paragraphs—

“(1) A qualifying company may, in the relevant period, have one or more subsidiaries if—

(a) the conditions mentioned in sub-paragraph (1A) below are satisfied in respect of the subsidiary or (as the case may be) each subsidiary and, except as provided in subparagraph (1B) below, continue to be so satisfied until the end of the relevant period; and

(b) the subsidiary or (as the case may be) each subsidiary exists wholly, or substantially wholly, for the purpose of carrying on one or more qualifying trades or is a property managing, or dormant, subsidiary.

(1A) The conditions are—

(a) that the qualifying company, or another of its subsidiaries, possesses not less than 90 per cent, of the issued share capital of, and not less than 90 per cent, of the voting power in, the subsidiary;

(b) that the qualifying company, or another of its subsidiaries, would in the event of a winding up of the subsidiary or in any other circumstances be beneficially entitled to receive more than 90 per cent, of the assets of the subsidiary which would then be available for distribution to equity holders of the subsidiary;

(c) that the qualifying company or another of its subsidiaries is beneficially entitled to not less than 90 per cent, of any profits of the subsidiary which are available for distribution to equity holders of the subsidiary;

(d) that no person other than the qualifying company or another of its subsidiaries has control of the subsidiary within the meaning of section 534 of the Taxes Act; and

(e) that no arrangements are in existence by virtue of which the conditions in paragraphs (a) to (d) above could cease to be satisfied.

(1B) The conditions shall not be regarded as ceasing to be satisfied by reason only of the subsidiary or the qualifying company being wound up, or dissolved without winding up, if—

(a) it is shown that the winding up or dissolution is for bona fide commercial reasons and not part of a scheme or arrangement the main purpose, or one of the main purposes, of which is the avoidance of tax; and

(b) the net assets (if any) of the subsidiary or, as the case may be, the qualifying company are distributed to its members or dealt with as bona vacantia before the end of the relevant period, or in the case of a winding up, the end (if later) of three years from the commencement of the winding up.

(1C) The conditions shall not be regarded as ceasing to be satisfied by reason only of the disposal by the qualifying company or (as the case may be) by another subsidiary, within the relevant period, of all its interest in the subsidiary if it is shown that the disposal is for bona fide commercial reasons and not part of a scheme or arrangement the main purpose or one of the main purposes of which is the avoidance of tax.

(1D) For the purposes of this paragraph—

(a) a subsidiary of a qualifying company is a property managing subsidiary if it exists wholly, or substantially wholly, for the purpose of holding and managing property used by the qualifying company, or by any of its subsidiaries, for the purposes of—

(i) research and development from which it is intended that a qualifying trade to be carried on by the company or any of its subsidiaries will be derived; or

(ii) one or more qualifying trades so carried on;

(b) a subsidiary is a dormant subsidiary if it has no profits for the purposes of corporation tax and no part of its business consists in the making of investments; and

(c) the persons who are equity holders of a subsidiary and the percentage of the assets of a subsidiary to which an equity holder would be entitled shall be determined in accordance with paragraphs 1 and 3 of Schedule 12 to the [1973 c. 51.] Finance Act 1973, taking references in paragraph 3 to the first company as references to an equity holder and references to a winding up as including references to any other circumstances in which assets of the subsidiary are available for distribution to its equity holders.”.

Miscellaneous

19 (1) In paragraph 2(9), for the words "to (8A)" there shall be substituted the words "and (8)".

(2) In paragraph 18(4), for the words "section 65(2)(c) of Chapter II" there shall be substituted the words "paragraph 17(lA)(e) above".

Eligible shares held jointly

20 After paragraph 19 there shall be inserted the following paragraph—

“Eligible shares held jointly

19A Where eligible shares are held on a bare trust for two or more beneficiaries, this Schedule shall have effect (with the necessary modifications) as if—

(a) each beneficiary had subscribed as an individual for all of those shares; and

(b) the amount subscribed by each beneficiary was equal to the total amount subscribed on the issue of those shares divided by the number of beneficiaries.”.

Interpretation

21 (1) Paragraph 20 shall be amended as follows.

(2) In sub-paragraph (2) the following definitions shall be inserted at the appropriate places—

• "appraisal licence" means an appraisal licence incorporating the model clauses set out in Schedule 4 to the [S.I. 1984/1832.] Petroleum (Production) (Landward Areas) Regulations 1984 or a Northern Ireland licence granted for the five year renewal term and includes in either case any modified appraisal licence;

• "development licence" means a development licence incorporating the model clauses set out in Schedule 5 to those regulations or a Northern Ireland licence granted for the thirty year renewal term and includes in either case any modified development licence;

• "exploration licence" means an exploration licence incorporating the model clauses set out in Schedule 3 to those regulations or a Northern Ireland licence granted for the initial term and includes in either case any modified exploration licence;

• "modified appraisal licence", "modified development licence" and "modified exploration licence" mean, respectively, any appraisal licence, development licence or exploration licence in which any of the relevant model clauses have been modified or excluded by the Secretary of State or, in Northern Ireland, by the Department of Economic Development;

• "Northern Ireland licence" means a licence granted under the [1964 c. 28 (N.I.).] Petroleum (Production) Act (Northern Ireland) 1964 and incorporating the model clauses set out in Schedule 2 to the [S.R. & O. (N.I.) 1965 No. 47.] Petroleum Production (Licences) Regulations (Northern Ireland) 1965, and in relation to such a licence the references above to "the initial term", "the five year renewal term" and "the thirty year renewal term" shall be construed in accordance with Clause 2 of Schedule 2 to those regulations; and

• "oil" and "oil extraction activities" have the same meaning as they have by virtue of section 19 of the [1975 c. 22.] Oil Taxation Act 1975, in Part II of that Act; and

• "oil exploration" means searching for oil.

(3) The following sub-paragraphs shall be added at the end—

“(3) For the purposes of this Schedule, the market value at any time of any asset shall be taken to be the price which it might reasonably be expected to fetch on a sale at that time in the open market free from any interest or right which exists by way of security in or over it.

(4) References in this Schedule to relief given to an individual in respect of eligible shares, and to the withdrawal of such relief, include respectively references to relief given to him in respect of those shares at any time after he has disposed of them and references to the withdrawal of such relief at any such time.

(5) Any reference in paragraph 2 above, as modified by paragraph 2B above, to any licence being held by, or granted to, any person shall be read as including a reference to such a licence being held by, or (as the case may be) granted to, that person together with one or more other persons.

(6) The Treasury may by order made by statutory instrument amend any of the definitions set out in sub-paragraph (2) above which relate to licences under the [1934 c. 36.] Petroleum (Production) Act 1934 or under the Petroleum (Production) Act (Northern Ireland) 1964.

(7) Any order under sub-paragraph (6) above shall be subject to annulment in pursuance of a resolution of the Commons House of Parliament.”.

PART II Consequential Amendments

22 In the [1970 c. 9.] Taxes Management Act 1970 the following section shall be inserted after section 47 A—

“47B Special jurisdiction relating to Business Expansion Scheme.

If and so far as the question in dispute on any appeal against the refusal of relief under Schedule 5 to the [1983 c. 28.] Finance Act 1983 (relief for investment in corporate trades), or against an assessment withdrawing any such relief, is a question of the value of an interest in land (within the meaning of paragraph 5A(5) of that Schedule), it shall be determined—

(a) if the land is in England and Wales, on a reference to the Lands Tribunal;

(b) if the land is in Scotland, on a reference to the Lands Tribunal for Scotland; and

(c) if the land is in Northern Ireland, on a reference to the Lands Tribunal for Northern Ireland”.

23 —The Table in section 98 of the Act of 1970 (penalties) shall be amended as follows—

(a) at the appropriate place in the first column there shall be inserted—

“Paragraph 15A(2) of Schedule 5 to the Finance Act 1983”; and

(b) at the appropriate place in the second column there shall be inserted—

“Paragraph 15A(1) of Schedule 5 to the Finance Act 1983”.