Finance Act 1996

92 [F1 Convertible securities etc: creditor relationships] U.K.

(1) This section applies to an asset if—

(a) the asset represents a creditor relationship of a company;

(b) the rights attached to the asset include provision by virtue of which the company is or may become entitled to acquire (whether by conversion or exchange or otherwise) [F2 shares in a company];

[F3 (bb) the only shares that may be so acquired under any such provision are shares which, at the time when the asset comes or came into existence are or were, and at all times since have been,—

(i) qualifying ordinary shares in one or more companies, or

(ii) mandatorily convertible preference shares in one or more companies;]

(c) the extent to which shares may be acquired under [F4 any such provision] is not determined using a cash value which is specified in that provision or which is or will be ascertainable by reference to the terms of that provision;

(d) the asset is not a relevant discounted security within the meaning of Schedule 13 to this Act [F5 or an excluded indexed security within the meaning of that Schedule];

[F6 (dd) the rights attached to the asset do not include provision by virtue of which the company may require a person other than the issuing company to acquire the asset for an amount which would, if payable on redemption, be an amount involving a deep gain for the purposes of paragraph 3 of that Schedule;]

(e) at the time when the asset came into existence there was a more than negligible likelihood that [F7 the rights] to acquire shares in a company would in due course be exercised to a significant extent; F8 . . .

[F9 (ee) the rights to acquire shares in a company (whether by conversion or exchange or otherwise) are such that exercising them to their full extent would result in the replacement of the asset—

(i) wholly by shares, or

(ii) in a case where exercising the rights to acquire shares to their full extent would not confer an entitlement to a whole number of shares, wholly by shares and a cash adjustment in respect of the fraction of a share so arising,

and the ending of the creditor relationship; and]

(f) the asset is not one the disposal of which by the company would fall to be treated as a disposal in the course of activities forming an integral part of a trade carried on by the company.

[F10 (1A) In subsection (1) above—

• “the issuing company” means the company that brought into existence the asset mentioned in subsection (1) above;

• “mandatorily convertible preference shares” means shares (other than qualifying ordinary shares) which are issued upon terms that stipulate that, by a time no more than 24 hours after their acquisition by a person who immediately before that acquisition had the creditor relationship represented by those shares, they must be converted into or exchanged for qualifying ordinary shares;

• “qualifying ordinary shares” means shares in a company which satisfy the conditions in subsections (1B) and (1C) below.

(1B) The first condition is that the shares are shares representing some or all of the issued share capital (by whatever name called) of the company, other than—

(a) capital the holders of which have a right to a dividend at a fixed rate but have no other right to share in the profits of the company, or

(b) capital the holders of which have no right to a dividend of any description nor any other right to share in the profits of the company.

(1C) The second condition is that the shares are—

(a) shares which are listed on a recognised stock exchange, or

(b) shares in a company which is a trading company or a holding company;

and for this purpose “trading company” and “holding company” have the meaning given by paragraph 22(1) of Schedule A1 to the Taxation of Chargeable Gains Act 1992.]

[F11 (1D) For the purposes of subsection (1)(ee)(ii) above, the amount which may be paid by way of a cash adjustment may not exceed five per cent of the value of the relevant shares at the relevant time; and for these purposes—

(a) “the relevant shares” means the shares which would be acquired by exercising the rights attached to the asset to their full extent, and

(b) “the relevant time” means the time at which the rights to acquire those shares are exercised.]

[F12 (1E) This section does not apply to an asset representing a creditor relationship of a company if, for the accounting period in which the asset comes into existence, there is a connection between the company and the company which is the issuing company in relation to that asset.

(1F) If, in the case of an asset representing a creditor relationship of a company, the company and the company which is the issuing company in relation to that asset become companies between which, for any accounting period, there is a connection—

(a) the asset shall cease to be an asset to which this section applies, and

(b) it shall be treated, for the purposes of subsection (7)(a) below, as having ceased to be such an asset at the time when the circumstances giving rise to that connection arose.

(1G) Section 87(3) above (connection between a company and another person for an accounting period) applies for the purposes of subsections (1E) and (1F) above.]

(2) The amounts falling for any accounting period to be brought into account for the purposes of this Chapter in respect of a creditor relationship represented by an asset to which this section applies shall be confined to

[F13 (a)] amounts relating to interest[F14 ; and

(b) amounts relating to exchange gains or losses]

(3) Only an authorised accruals basis of accounting shall be used for ascertaining those amounts.

(4) Amounts shall be brought into account in computing the profits of the company for the purposes of corporation tax as if the M1 Taxation of Chargeable Gains Act 1992 had effect in relation to any asset to which this section applies as it has effect in relation to an asset that does not represent a loan relationship.

(5) For the purposes of that Act the amount or value of the consideration for any disposal or acquisition of the asset shall be treated as adjusted so as to exclude so much of it as, on a just and reasonable apportionment, relates to any interest which—

(a) falls to be brought into account under subsections (2) and (3) above as accruing to any company at any time; and

(b) in consequence of, or of the terms of, the disposal or acquisition, is not paid or payable to the company to which it is treated for the purposes of this Chapter as accruing.

[F15 (5A) For the purposes of that Act the amount or value of the consideration for any disposal of the asset—

(a) shall be increased by the addition of any relevant exchange losses, determined in accordance with subsection (5C) below; and

(b) shall (after giving effect to any such increase) be reduced (but not below nil) by the deduction of any relevant exchange gains, determined in accordance with that subsection.

(5B) In subsection (5C) below—

• “relevant accounting period” means any accounting period beginning on or after 1st October 2002; and

• “the relevant condition” is that the asset in question is an asset to which this section applies and is held by the company making the disposal.

(5C) For the purposes of subsection (5A) above, relevant exchange gains or, as the case may be, losses in the case of any asset are—

(a) the amount of any exchange gains or, as the case may be, losses brought into account under subsections (2) and (3) above in respect of the asset, by the company making the disposal, for a relevant accounting period throughout which the relevant condition is satisfied; and

(b) for any relevant accounting period not falling within paragraph (a) above in which the relevant condition is at some time satisfied, an amount which, on a just and reasonable apportionment, represents so much of the amount of any exchange gains or, as the case may be, losses brought into account under subsections (2) and (3) above in respect of the asset, by the company making the disposal, for that period as is referable to the part of the period for which the relevant condition is satisfied.

(5D) Where—

(a) the amount of the relevant exchange gains falling to be deducted under subsection (5A)(b) above, exceeds

(b) the amount required to reduce the amount or value of the consideration to nil,

the excess shall be treated for the purposes of section 38(1)(c) of the Taxation of Chargeable Gains Act 1992 as incidental costs of making the disposal of the asset.]

(6) In [F16 subsections (5) and (5A)] above the references to a disposal, in relation to an asset, are references to anything which—

(a) is a disposal of that asset (within the meaning of the Taxation of Chargeable Gains Act 1992); or

(b) would be such a disposal but for section F17 . . . 116(10) of that Act (reorganisations etc.);

and the references to the acquisition of an asset shall be construed accordingly.

[F18 (7) Where an asset representing a creditor relationship of a company—

(a) ceases at any time to be an asset to which this section applies, but

(b) does not cease at that time to represent a creditor relationship of that company,

the company shall be deemed for the purposes of the M2 Taxation of Chargeable Gains Act 1992 and this Chapter to have disposed of the asset immediately before that time for the relevant consideration, and to have re-acquired it immediately after that time for the relevant consideration.

(8) Any deemed disposal and re-acquisition under subsection (7) above shall be treated for the purposes of that Act of 1992 as a transaction in the case of which—

(a) sections 127 to 130 of that Act would apply, apart from the provisions of section 116 of that Act, by virtue of any provision of Chapter II of Part IV of that Act;

(b) the asset in question represents both the original shares and the new holding for the purposes of those sections;

(c) the market value of the asset at the time of the transaction is an amount equal to the relevant consideration.

(9) Subject to [F19 subsections (10) and (10A)] below, in subsections (7) and (8) above “the relevant consideration”, in relation to an asset, means the amount that would have been taken, in accordance with the relevant accounting method, to be the value of the asset at the time of its deemed disposal if that method had been applied to the asset for tax purposes at all times until then.

(10) Subsection (5) above shall not apply in the case of a deemed disposal and re-acquisition under subsection (7) above; but the amount of the relevant consideration in such a case shall be treated for the purposes of the Taxation of Chargeable Gains Act 1992 as reduced by so much (if any) of the amount mentioned in subsection (9) above as is referable to interest which—

(a) is not paid or payable to the company before the time of the deemed disposal; but

(b) is interest falling to be brought into account under subsections (2) and (3) above as having accrued before that time.

[F20 (10A) Subsection (5A) above shall not apply in the case of a deemed disposal and re-acquisition under subsection (7) above; but in any such case the amount of the relevant consideration, after any reduction under subsection (10) above, shall be treated for the purposes of the Taxation of Chargeable Gains Act 1992 as further adjusted by making the same additions and deductions (and for the purposes of both the disposal and the re-acquisition) as would fall to be made under subsection (5A) above if it were the consideration for an actual disposal and that subsection also applied in relation to the corresponding acquisition.]

(11) In subsection (9) above “the relevant accounting method”, in relation to an asset representing a creditor relationship of a company, means the accounting method which, for the accounting period of that company in which the deemed re-acquisition takes place, is used as respects that asset and the part of that accounting period beginning with the deemed re-acquisition.]

Textual Amendments

F1 S. 92 sidenote substituted (24.7.2002 with effect as mentioned in s. 72(13)-(16) of the amending Act) by virtue of Finance Act 2002 (c. 23), s. 72(12)

F2 Words in s. 92(1)(b) substituted (24.7.2002 with effect as mentioned in s. 72(13)-(16) of the amending Act) by Finance Act 2002 (c. 23), s. 72(3)

F3 S. 92(1)(bb) inserted (24.7.2002 with effect as mentioned in s. 72(13)-(16) of the amending Act) by Finance Act 2002 (c. 23), s. 72(4)

F4 Words in s. 92(1)(c) substituted (24.7.2002 with effect as mentioned in s. 72(13)-(16) of the amending Act) by Finance Act 2002 (c. 23), s. 72(5)

F5 Words in s. 92(1)(d) inserted (24.7.2002 with effect as mentioned in s. 72(13)-(16) of the amending Act) by Finance Act 2002 (c. 23), s. 72(6)

F6 S. 92(1)(dd) inserted (24.7.2002 with effect as mentioned in s. 72(13)-(16) of the amending Act) by Finance Act 2002 (c. 23), s. 72(7)

F7 Words in s. 92(1)(e) substituted (24.7.2002 with effect as mentioned in s. 72(13)-(16) of the amending Act) by Finance Act 2002 (c. 23), s. 72(8)(a)

F8 Word in s. 92(1)(e) repealed (24.7.2002 with effect as mentioned in s. 72(13)-(16) of the repealing Act) by Finance Act 2002 (c. 23), ss. {72(8)(b)}, 141, {Sch. 40 Pt. 3(9)}

F9 S. 92(1)(ee) inserted (24.7.2002 with effect as mentioned in s. 72(13)-(16) of the amending Act) by Finance Act 2002 (c. 23), s. 72(9)

F10 S. 92(1A)-(1C) inserted (24.7.2002 with effect as mentioned in s. 72(13)-(16) of the amending Act) by Finance Act 2002 (c. 23), s. 72(10)

F11 S. 92(1D) inserted (24.7.2002 with effect as mentioned in s. 72(13)-(16) of the amending Act) by Finance Act 2002 (c. 23), s. 72(11)

F12 S. 92(1E)-(1G) inserted (24.7.2002 with effect as mentioned in s. 73(2)-(9) of the amending Act) by Finance Act 2002 (c. 23), s. 73(1)

F13 Words in s. 92(2) renumbered (24.7.2002 with effect as mentioned in s. 79(3) of the amending Act) as s. 92(2)(a) by virtue of Finance Act 2002 (c. 23), s. 79(2), Sch. 23 Pt. 1 para. 5(2) (with Sch. 23 Pt. 3 para. 25)

F14 S. 92(2)(b) and preceding word inserted (24.7.2002 with effect as mentioned in s. 79(3) of the amending Act) by Finance Act 2002 (c. 23), s. 79(2), Sch. 23 Pt. 1 para. 5(2) (with Sch. 23 Pt. 3 para. 25)

F15 S. 92(5A)-(5D) inserted (24.7.2002 with effect as mentioned in s. 79(3) of the amending Act) by Finance Act 2002 (c. 23), s. 79(2), Sch. 23 Pt. 1 para. 5(3) (with Sch. 23 Pt. 3 para. 25)

F16 Words in s. 92(6) substituted (24.7.2002 with effect as mentioned in s. 79(3) of the amending Act) by Finance Act 2002 (c. 23), s. 79(2), Sch. 23 Pt. 1 para. 5(4)(a) (with Sch. 23 Pt. 3 para. 25)

F17 Words in s. 92(6)(b) repealed (24.7.2002 with effect as mentioned in s. 79(3) of and Sch. 23 to the repealing Act) by Finance Act 2002 (c. 23), ss. 79(2), 141, Sch. 23 Pt. 1 para. 5(4)(b), Sch. 40 Pt. 3(10) (with Sch. 23 Pt. 3 para. 25)

F18 S. 92(7)-(11) inserted (27.7.1999 with effect as mentioned in s. 65(8) of the amending Act) by 1999 c. 16, s. 65(7)

F19 Words in s. 92(9) substituted (24.7.2002 with effect as mentioned in s. 79(3) of the amending Act) by Finance Act 2002 (c. 23), s. 79(2), Sch. 23 Pt. 1 para. 5(5) (with Sch. 23 Pt. 3 para. 25)

F20 S. 92(10A) inserted (24.7.2002 with effect as mentioned in s. 79(3) of the amending Act) by Finance Act 2002 (c. 23), s. 79(2), Sch. 23 Pt. 1 para. 5(6) (with Sch. 23 Pt. 3 para. 25)

Modifications etc. (not altering text)

C1 S. 92 modified (27.7.1999) by 1999 c. 16, s. 65(9)

C2 S. 92(7) modified (24.7.2002 with effect as mentioned in s. 73(2)-(9) of the amending Act) by Finance Act 2002 (c. 23), s. 73(4)

Marginal Citations

M1 1992 c. 12.

M2 1992 c. 12.