Finance Act 1989

Section 94.

SCHEDULE 11 Deep Gain Securities

Deep gain securities

1 (1) For the purposes of this Schedule a deep gain security is a redeemable security (whenever issued) which fulfils the first and second conditions.

(2) The first condition is that, taking the security at the time it is issued and assuming redemption, the amount payable on redemption might constitute a deep gain; and if the security is capable of redemption on one of a number of occasions, this condition is fulfilled if it is fulfilled as regards any one of them.

(3) For the purposes of sub-paragraph (2) above “redemption” does not include any redemption which may be made before maturity only at the option of the person who issued the security (and no other person).

(4) The second condition is that the security—

(a) is not a deep discount security (either because the amount payable on redemption is not known at issue or for some other reason),

(b) is not a share in a company,

(c) is not a qualifying indexed security,

(d) is not a convertible security, and

(e) does not fall within sub-paragraph (5), (6) or (7) below.

(5) A security falls within this sub-paragraph if it is a gilt-edged security and—

(a) it was issued before 14th March 1989, or

(b) it was issued on or after that date but was issued under the same prospectus as any gilt-edged security issued before that date.

(6) A security falls within this sub-paragraph if it is a gilt-edged security and—

(a) it was issued under a prospectus under which no securities were issued before 14th March 1989,

(b) it was issued otherwise than on the occasion of the original issue under the prospectus, and

(c) all the securities issued on the occasion of the original issue under the prospectus are gilt-edged securities which are not deep gain securities.

(7) A security falls within this sub-paragraph if it is not a gilt-edged security and was issued (at whatever time) under the same prospectus as any other security which was issued before the security in question and which is not a deep gain security.

(8) For the purposes of this paragraph—

(a) a deep discount security is a security which is a deep discount security for the purposes of Schedule 4 to the Taxes Act 1988,

(b) “qualifying indexed security” has the meaning given by paragraph 2 below, and

(c) a gilt-edged security is a security which is a gilt-edged security for the purposes of the [1979 c. 14.] Capital Gains Tax Act 1979.

(9) For the purposes of this paragraph the amount payable on redemption of a security constitutes a deep gain if the issue price is less than the amount so payable, and the amount by which it is less represents more than—

(a) 15 per cent. of the amount so payable, or

(b) half Y per cent. of the amount so payable, where Y is the number of complete years between the date of issue and the redemption date.

(10) For the purposes of this paragraph the amount payable on redemption does not include any amount payable by way of interest.

Qualifying indexed securities

2 (1) For the purposes of paragraph 1 above a qualifying indexed security is a security which fulfils each of the conditions set out below.

(2) The first condition is that—

(a) the security is denominated in sterling and under the terms of issue the amount payable on redemption is determined by reference to the movement of the retail prices index,

(b) the security is denominated in a currency other than sterling and under the terms of issue the amount payable on redemption is determined by reference to any similar general index of prices which is published by the government, or by an agent of the government, of the territory in whose currency the security is denominated, or

(c) the security was issued before 9th June 1989 and was quoted in the official list of a recognised stock exchange on 8th June 1989, and under the terms of issue the amount payable on redemption is determined by reference to the movement of a published index of prices of shares quoted in the official list of a recognised stock exchange.

(3) The second condition is that the terms of issue make no provision for conversion into, or redemption in, a currency other than that in which the security is denominated on issue.

(4) The third condition is that under the terms of issue—

(a) interest is payable on the security,

(b) not more than one year can elapse between the day of issue and the first day on which interest becomes payable, or between any day on which interest becomes payable and the next day on which it becomes payable,

(c) the interest payable is determined by reference to a rate which is not less than a reasonable commercial rate (judged by reference to the date of issue and by reference to securities of a similar nature to the one in question), and

(d) the interest payable is also determined by reference to the movement of the index by reference to which the amount payable on redemption is determined.

(5) The fourth condition is that where that index is applied to determine the amount payable on redemption or to determine interest it must, under the terms of issue, be applied precisely and without restriction.

(6) The fifth condition is that—

(a) the security is expressed to be issued for a definite period stated on the face of the security, and

(b) the period so stated commences with the day of issue and is five years or more.

(7) The sixth condition is that the terms of issue contain no provision enabling the person who holds the security for the time being to require any of the following before the expiry of a period which commences with the day of issue and which is five years or more—

(a) the security to be repurchased by the person who issued it;

(b) the security to be purchased by a person other than the person who issued it;

(c) the security to be converted into another kind of security;

(d) the security to be redeemed in circumstances other than any of the qualifying circumstances (set out in sub-paragraph (13) below).

(8) The seventh condition is that, where the issue is handled by an agent for the person making the issue or by an underwriter, the terms on which the agent or underwriter offers the security—

(a) contain no provision for the security to be repurchased by the person who issued it, converted into another kind of security, or redeemed, before the expiry of a period which commences with the day of issue and which is five years or more, and

(b) contain no provision enabling the person who holds the security for the time being to require the security to be purchased, by a person other than the person who issued it, before the expiry of a period which commences with the day of issue and which is five years or more.

(9) For the purposes of sub-paragraph (5) above “redemption” does not include any redemption which may be made before maturity only at the option of the person who issued the security (and no other person).

(10) In a case where the amount payable on redemption, or the amount of interest, is under the terms of issue determined by reference to the movement of the index for a period (a notional period) in place of a later actual period (a process commonly known as lagging) the fourth condition shall be treated as fulfilled if the following rules are fulfilled—

(a) under the terms of issue the notional period must start not more than eight months before the actual period starts and must end not more than eight months before the actual period ends, and

(b) where the index is applied for the notional period it must, under the terms of issue, be applied precisely and without restriction.

(11) In a case where the terms of issue contain provision for the amount payable on redemption to be not less than an amount stated in the terms, the provision shall not prevent the fourth condition being fulfilled if—

(a) the security was issued before 9th June 1989, and

(b) the amount stated does not constitute a deep gain (within the meaning given by paragraph 1(9) above).

(12) In a case where—

(a) the terms of issue contain provision for the amount payable on redemption in any of the qualifying circumstances (set out in sub-paragraph (13) below) to be not less than an amount stated in the terms, and

(b) the security was issued before 9th June 1989,

the provision shall not prevent the fourth condition being fulfilled.

(13) For the purposes of sub-paragraphs (7) and (12) above the following are qualifying circumstances—

(a) there is a fundamental change in the rules governing the index and the change would be detrimental to the interests of the person who holds the security for the time being;

(b) the index ceases to be published without being replaced by a comparable index;

(c) the person who issued the security fails to comply with the duties imposed on him by the terms of issue;

(d) the security was issued by a company before 9th June 1989 and a person gains control of the company in pursuance of the acceptance of an offer made by that person to acquire shares in the company.

(14) In a case where an issue is handled by an agent for the person making the issue, or by an underwriter, for the purposes of sub-paragraphs (2) to (5) and (10) above the terms of issue shall be taken to include any terms on which the agent or underwriter offers the security.

(15) For the purposes of this paragraph the amount payable on redemption does not include any amount payable by way of interest.

(16) For the purposes of this paragraph “control” (in relation to a company) shall be construed in accordance with section 840 of the Taxes Act 1988.

Convertible securities

3 (1) For the purposes of paragraph 1 above a security is a convertible security if—

(a) it was issued by a company before 9th June 1989,

(b) under the terms of issue it can be converted into or exchanged for share capital in a company (whether or not the company is the one which issued the security), and

(c) the condition set out in sub-paragraph (2) below is fulfilled.

(2) The condition is that—

(a) at some time in the qualifying period the security was quoted in the official list of a recognised stock exchange,

(b) at some time in that period relevant share capital was so quoted, or

(c) each of paragraphs (a) and (b) above is satisfied (though not necessarily as regards the same time).

(3) For the purposes of sub-paragraph (2) above the qualifying period is the period of one month beginning with the day on which the security was issued.

(4) For the purposes of sub-paragraph (2) above relevant share capital is share capital in the company into whose share capital the security can be converted or for whose share capital the security can be exchanged; and relevant share capital need not be share capital into or for which the security can be converted or exchanged.

(5) References in this paragraph to share capital are to share capital by whatever name called.

Meaning of transfer etc.

4 (1) This paragraph has effect for the purposes of this Schedule.

(2) “Transfer”, in relation to a security, means transfer by way of sale, exchange, gift or otherwise.

(3) Where an agreement for the transfer of a security is made, it is transferred, and the person to whom it is agreed to be transferred becomes entitled to it, when the agreement is made and not on a later transfer made pursuant to the agreement; and “entitled”, “transfer” and cognate expressions shall be construed accordingly.

(4) A person holds a security at a particular time if he is entitled to it at the time.

(5) A person acquires a security when he becomes entitled to it; and “acquisition” shall be construed accordingly.

(6) If an agreement is conditional (whether on the exercise of an option or otherwise) for the purposes of sub-paragraph (3) above it is made when the condition is exercised.

Charge to tax on transfer

5 (1) This paragraph applies if—

(a) there is a transfer of a deep gain security on or after 14th March 1989 (irrespective of when the person making the transfer acquired it), and

(b) the amount obtained on transfer exceeds the amount paid on acquisition.

(2) In such a case—

(a) an amount equal to the difference between those two amounts, less the amount of any costs, shall be treated as income of the person making the transfer,

(b) the income shall be chargeable to tax under Case III or Case IV (as the case may be) of Schedule D,

(c) the income shall be treated as arising in the year of assessment in which the transfer takes place, and

(d) notwithstanding anything in sections 64 to 67 of the Taxes Act 1988, the tax shall be computed on the income arising in the year of assessment for which the computation is made.

(3) For the purposes of this paragraph—

(a) the amount obtained on transfer is the amount obtained, in respect of the transfer, by the person making it,

(b) the amount paid on acquisition is the amount paid by that person in respect of his acquisition of the security (or his last acquisition of it before the transfer), and

(c) costs are the costs incurred by that person in connection with the transfer and with his acquisition of the security (or his last acquisition of it before the transfer).

(4) For the purposes of sub-paragraph (3)(a) above the person making the transfer shall be treated as obtaining in respect of it—

(a) any amount he actually obtains in respect of it, and

(b) any amount he is entitled to obtain, but does not obtain, in respect of it.

(5) Sub-paragraph (4) above shall not apply where paragraph 7, 8 or 9 below applies.

Redemption

6 (1) Paragraph 5 above applies where there is a redemption of a deep gain security as well as where there is a transfer.

(2) In its application by virtue of sub-paragraph (1) above, paragraph 5 above shall have effect as if—

(a) references to the person making the transfer were to the person who was entitled to the security immediately before redemption, and

(b) other references to transfer were to redemption.

Death

7 (1) Where an individual who is entitled to a security dies, for the purposes of this Schedule—

(a) he shall be treated as transferring it to his personal representatives immediately before his death, and

(b) he shall be treated as obtaining in respect of the transfer an amount equal to the market value of the security at the time of the transfer.

(2) Where a security is transferred by personal representatives to a legatee, for the purposes of paragraph 5 above they shall be treated as obtaining in respect of the transfer an amount equal to the market value of the security at the time of the transfer.

(3) In sub-paragraph (2) above “legatee” includes any person taking (whether beneficially or as trustee) under a testamentary disposition or on an intestacy or partial intestacy, including any person taking by virtue of an appropriation by the personal representatives in or towards satisfaction of a legacy or other interest or share in the deceased’s property.

Connected persons

8 (1) This paragraph applies where a security is transferred from one person to another (whether or not on or after 14th March 1989) and they are connected with each other.

(2) For the purposes of paragraph 5 above—

(a) the person making the transfer shall be treated as obtaining in respect of it an amount equal to the market value of the security at the time of the transfer, and

(b) the person to whom the transfer is made shall be treated as paying in respect of his acquisition of the security an amount equal to that market value.

(3) Section 839 of the Taxes Act 1988 (connected persons) shall apply for the purposes of this paragraph.

Market value

9 (1) This paragraph applies where a security is transferred from one person to another (whether or not on or after 14th March 1989) and—

(a) the transfer is made for a consideration which consists of or includes consideration not in money or money’s worth, or

(b) the transfer is made otherwise than by way of a bargain made at arm’s length.

(2) For the purposes of paragraph 5 above—

(a) the person making the transfer shall be treated as obtaining in respect of it an amount equal to the market value of the security at the time of the transfer, and

(b) the person to whom the transfer is made shall be treated as paying in respect of his acquisition of the security an amount equal to that market value.

Underwriters

10 (1) An underwriting member of Lloyd’s shall be treated for the purposes of this Schedule as absolutely entitled as against the trustees to the securities forming part of his premiums trust fund, his special reserve fund (if any) and any other trust fund required or authorised by the rules of Lloyd's, or required by the underwriting agent through whom his business or any part of it is carried on, to be kept in connection with the business.

(2) Where a security forms part of a premiums trust fund at the end of 31st December of any relevant year, for the purposes of this Schedule—

(a) the trustees of the fund shall be treated as transferring it on that day, and

(b) they shall be treated as obtaining in respect of the transfer an amount equal to the market value of the security at the time of the transfer;

and for this purpose relevant years are 1989 and subsequent years.

(3) Where a security forms part of a premiums trust fund at the beginning of 1st January of any relevant year, for the purposes of this Schedule—

(a) the trustees of the fund shall be treated as acquiring it on that day, and

(b) they shall be treated as paying in respect of the acquisition an amount equal to the market value of the security at the time of the acquisition;

and for this purpose relevant years are 1990 and subsequent years.

(4) Sub-paragraph (5) below applies where the following state of affairs exists at the beginning of 1st January of any year or the end of 31st December of any year—

(a) securities have been transferred by the trustees of a premiums trust fund in pursuance of an arrangement mentioned in section 129(1) or (2) of the Taxes Act 1988,

(b) the transfer was made to enable another person to fulfil a contract or to make a transfer,

(c) securities have not been transferred in return, and

(d) section 129(3) of that Act applies to the transfer made by the trustees.

(5) The securities transferred by the trustees shall be treated for the purposes of sub-paragraphs (2) and (3) above as if they formed part of the premiums trust fund at the beginning of 1st January concerned or the end of 31st December concerned (as the case may be).

(6) Paragraph 7(1) above shall not apply where the individual concerned is an underwriting member of Lloyd’s and the security concerned forms part of a premiums trust fund, a special reserve fund or any other trust fund required or authorised by the rules of Lloyd's, or required by the underwriting agent through whom the individual’s business or any part of it is carried on, to be kept in connection with the business.

(7) In a case where an amount treated as income chargeable to tax by virtue of paragraph 5(2) above constitutes profits or gains mentioned in section 450(1) of the Taxes Act 1988—

(a) section 450(1)(b) shall apply, and

(b) paragraph 5(2)(c) above shall not apply.

(8) For the purpose of computing income tax for the year 1987-88 sub-paragraph (7) above shall have effect as if—

(a) the reference to section 450(1) of the Taxes Act 1988 were to paragraph 2 of Schedule 16 to the [1973 c. 51.] Finance Act 1973, and

(b) the reference to section 450(1)(b) were to paragraph 2(b) of that Schedule.

(9) In this paragraph “business” and “premiums trust fund” have the meanings given by section 457 of the Taxes Act 1988.

Trustees

11 (1) Where on a transfer or redemption of a security by trustees an amount is treated as income chargeable to tax by virtue of paragraph 5 above, the rate at which it is chargeable shall be a rate equal to the sum of the basic rate and the additional rate for the year of assessment in which the transfer is made.

(2) Where the trustees are trustees of a scheme to which section 469 of the Taxes Act 1988 applies, sub-paragraph (1) above shall not apply if or to the extent that the amount is treated as income in the accounts of the scheme.

Foreign currency

12 (1) Where, for the purposes of paragraph 5 above and apart from this paragraph, the amount obtained on transfer would be an amount expressed in a currency other than sterling, it shall be treated for those purposes as the sterling equivalent on the day of the transfer of the amount so expressed.

(2) Where, for the purposes of paragraph 5 above and apart from this paragraph, the amount paid on acquisition would be an amount expressed in a currency other than sterling, it shall be treated for those purposes as the sterling equivalent on the day of the acquisition of the amount so expressed.

(3) Where, for the purposes of paragraph 5 above and apart from this paragraph, the amount of the costs incurred by a person in connection with a transfer would be an amount expressed in a currency other than sterling, it shall be treated for those purposes as the sterling equivalent on the day of the transfer of the amount so expressed.

(4) Where, for the purposes of paragraph 5 above and apart from this paragraph, the amount of the costs incurred by a person in connection with an acquisition would be an amount expressed in a currency other than sterling, it shall be treated for those purposes as the sterling equivalent on the day of the acquisition of the amount so expressed.

(5) In sub-paragraphs (1) and (3) above “transfer” includes “redemption”.

(6) For the purposes of this paragraph the sterling equivalent of an amount on a particular day is the sterling equivalent calculated by reference to the London closing rate of exchange for that day.

Receipts in United Kingdom

13 (1) Sub-paragraph (2) below applies where—

(a) by virtue of paragraph 5(2) above an amount is treated as income of a person and as chargeable to tax under Case IV of Schedule D, and

(b) the person satisfies the Board, on a claim in that behalf, that he is not domiciled in the United Kingdom, or that (being a Commonwealth citizen or a citizen of the Republic of Ireland) he is not ordinarily resident in the United Kingdom.

(2) In such a case—

(a) any amounts received in the United Kingdom in respect of the amount treated as income shall be treated as income arising in the year of assessment in which they are so received, and

(b) paragraph 5(2) above shall have effect with the substitution of paragraph (a) above for paragraph 5(2)(c).

(3) For the purposes of sub-paragraph (2) above—

(a) there shall be treated as received in the United Kingdom all amounts paid, used or enjoyed in, or in any manner or form transmitted or brought to, the United Kingdom, and

(b) subsections (6) to (9) of section 65 of the Taxes Act 1988 shall apply as they apply for the purposes of subsection (5) of that section.

Retirement benefit schemes

14 In a case where—

(a) paragraph 5 above would apply (apart from this paragraph) to a transfer or redemption of a security, and

(b) immediately before the transfer or redemption was made the security was held for the purposes of an exempt approved scheme (within the meaning of Chapter I of Part XIV of the Taxes Act 1988),

that paragraph shall not apply to the transfer or redemption.

Charities

15 (1) In a case where—

(a) paragraph 5 above would apply (apart from this paragraph) to a transfer or redemption of a security,

(b) immediately before the transfer or redemption was made the security was held by a charity, and

(c) the amount which would (apart from this paragraph) be treated as income by virtue of paragraph 5 above is applicable and applied for charitable purposes,

that paragraph shall not apply to the transfer or redemption.

(2) In this paragraph “charity” has the same meaning as in section 506 of the Taxes Act 1988.

Stock lending

16 In a case where—

(a) a security is the subject of a transfer which falls within section 129(3) of the Taxes Act 1988, and

(b) paragraph 5 above would apply to the transfer (apart from this paragraph),

that paragraph shall not apply to the transfer.

Accrued income scheme

17 In a case where—

(a) a security is the subject of a transfer to which paragraph 5 above applies, and

(b) apart from this paragraph, the transfer would be a transfer for the purposes of sections 710 to 728 of the Taxes Act 1988,

the transfer shall not be a transfer for those purposes.

Other provisions excluded

18 In a case where paragraph 5 above applies to the redemption of a security, sections 123 and 348 to 350 of the Taxes Act 1988 shall not apply to any proceeds of the redemption.

Identification of securities

19 Section 88 of the [1982 c. 39.] Finance Act 1982 shall apply to the identification, for the purposes of this Schedule, of deep gain securities transferred or redeemed as it applies to the identification, for the purposes of capital gains tax, of deep discount securities disposed of.

Gilts: special rules

20 (1) In a case where—

(a) securities have been issued under a prospectus under which no securities were issued before 14th March 1989,

(b) some of the securities issued under the prospectus are gilt-edged securities which are would-be deep gain securities,

(c) some of the securities issued under the prospectus are gilt-edged securities which are not would-be deep gain securities, and

(d) there is a time when the aggregate nominal value of the securities falling within paragraph (b) above (at that time) exceeds the aggregate nominal value of the securities falling within paragraph (c) above (at that time),

sub-paragraph (2) below shall apply in relation to any gilt-edged security which has been or is issued under the prospectus at any time (whether before, at or after the time mentioned in paragraph (d) above).

(2) As regards any event occurring in relation to the security after the time mentioned in sub-paragraph (1)(d) above, paragraphs 5 to 19 above shall have effect as if—

(a) the security were a deep gain security, and

(b) it had been acquired as such (whatever the time it was acquired).

(3) For the purposes of sub-paragraph (1) above a would-be deep gain security is a security which would be a deep gain security apart from paragraph 1(6) above.

(4) In sub-paragraph (1) above “gilt-edged security” has the same meaning as in paragraph 1 above.

(5) For the purposes of sub-paragraph (2) above events, in relation to a security, include anything constituting a transfer or acquisition for the purposes of this Schedule.

Non-gilts: special rules

21 (1) In a case where—

(a) all the securities issued on the occasion of the original issue under a particular prospectus (whatever the time of the issue) are neither gilt-edged securities nor deep gain securities,

(b) some of the securities issued under the prospectus are not gilt-edged securities but are new would-be deep gain securities, and

(c) there is a time when the aggregate nominal value of the securities falling within paragraph (b) above (at that time) exceeds the aggregate nominal value of the securities which (looking at the state of affairs at that time) have been issued under the prospectus and are neither gilt-edged securities nor new would-be deep gain securities,

sub-paragraph (2) below shall apply in relation to any security which is not a gilt-edged security but which has been or is issued under the prospectus at any time (whether before, at or after the time mentioned in paragraph (c) above).

(2) As regards any event occurring in relation to the security after the time mentioned in sub-paragraph (1)(c) above, paragraphs 5 to 19 above shall have effect as if—

(a) the security were a deep gain security, and

(b) it had been acquired as such (whatever the time it was acquired).

(3) For the purposes of sub-paragraph (1) above a new would-be deep gain security is a security which—

(a) would be a deep gain security apart from paragraph 1(7) above, and

(b) was issued on or after 14th March 1989.

(4) In sub-paragraph (1) above “gilt-edged security” has the same meaning as in paragraph 1 above.

(5) For the purposes of sub-paragraph (2) above events, in relation to a security, include anything constituting a transfer or acquisition for the purposes of this Schedule.

Indexed securities: special rules

22 (1) Sub-paragraph (2) below applies where—

(a) a qualifying indexed security has been issued,

(b) the person by whom it was issued and the person for the time being holding it make an agreement, on or after 14th March 1989, varying the terms under which it is held, and

(c) the terms as varied are such that, had the security been issued on those terms, it would be a deep gain security.

(2) As regards any event occurring in relation to the security after the agreement is made, paragraphs 5 to 19 above shall have effect as if—

(a) the security were a deep gain security, and

(b) it had been acquired as such (whatever the time it was acquired).

(3) For the purposes of sub-paragraph (2) above events, in relation to a security, include anything constituting a transfer or acquisition for the purposes of this Schedule.

(4) In this paragraph “qualifying indexed security” has the meaning given by paragraph 2 above.

Power to modify

23 (1) The Treasury may make regulations amending paragraph 2 above so as to do one or more of the following—

(a) vary any condition for the time being set out in that paragraph;

(b) omit any condition for the time being so set out;

(c) add a new condition to any for the time being so set out;

(d) substitute a condition or conditions for any condition or conditions for the time being so set out.

(2) Regulations under sub-paragraph (1) above—

(a) shall be made by statutory instrument subject to annulment in pursuance of a resolution of the House of Commons,

(b) shall apply where there is a transfer within the meaning of this Schedule, or a redemption, on or after such day as may be specified in the regulations, and

(c) may include such supplementary, incidental, consequential or transitional provisions as appear to the Treasury to be necessary or expedient.