Finance Act 2005

Arrangements giving rise to alternative finance return U.K.

47 Alternative finance arrangements: [F1 purchase and re-sale] U.K.

(1) Subject to subsection (3) and section 52, arrangements fall within this section if they are arrangements entered into between two persons under which—

(a) a person (“X”) purchases an asset and sells it, either immediately or in circumstances in which the conditions in subsection (2) are met, to the other person (“Y”),

(b) the amount payable by Y in respect of the sale (“the sale price”) is greater than the amount paid by X in respect of the purchase (“the purchase price”),

(c) all or part of the sale price is not required to be paid until a date later than that of the sale, and

(d) the difference between the sale price and the purchase price equates, in substance, to the return on an investment of money at interest.

(2) The conditions referred to in subsection (1)(a) are—

(a) that X is a financial institution, and

(b) that the asset referred to in that provision was purchased by X for the purpose of entering into arrangements falling within this section.

(3) Arrangements do not fall within this section unless at least one of the parties is a financial institution.

(4) For the purposes of this section “the effective return” is so much of the sale price as exceeds the purchase price.

F2 (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(6) If under arrangements falling within this section the whole of the sale price is paid on one day, that sale price is to be taken [F3 for the purposes of this Chapter] to include alternative finance return equal to the effective return.

(7) If under arrangements falling within this section the sale price is paid by instalments, each instalment is to be taken [F4 for the purposes of this Chapter] to include alternative finance return equal to the appropriate amount.

(8) The appropriate amount, in relation to any instalment, is an amount equal to the interest that would have been included in the instalment if—

(a) the effective return were the total interest payable on a loan by X to Y of an amount equal to the purchase price,

(b) the instalment were a part repayment of the principal with interest, and

(c) the loan were made on arm's length terms and accounted for under generally accepted accounting practice.

Textual Amendments

F1 Words in s. 47 heading substituted (with effect in accordance with s. 96(8) of the amending Act) by Finance Act 2006 (c. 25), s. 96(2)(c)

F2 S. 47(5) repealed (with effect in accordance with s. 96(8) of the amending Act) by Finance Act 2006 (c. 25), s. 96(2)(a), Sch. 26 Pt. 3(17)

F3 Words in s. 47(6) inserted (with effect in accordance with s. 96(8) of the amending Act) by Finance Act 2006 (c. 25), s. 96(2)(b)

F4 Words in s. 47(7) inserted (with effect in accordance with s. 96(8) of the amending Act) by Finance Act 2006 (c. 25), s. 96(2)(b)

[F5 47A Alternative finance arrangements: diminishing shared ownership U.K.

(1) Subject to section 52, arrangements fall within this section if under them—

(a) a financial institution acquires a beneficial interest in an asset, and

(b) another person (“the eventual owner”)—

(i) also acquires a beneficial interest in the asset,

(ii) is to make payments to the financial institution amounting in aggregate to the consideration paid for the acquisition of its beneficial interest,

(iii) is to acquire the financial institution's beneficial interest (whether or not in stages) as a result of those payments,

(iv) is to make other payments to the financial institution (whether in pursuance of a lease forming part of the arrangements, or otherwise),

(v) has the exclusive right to occupy or otherwise use the asset,

(vi) is exclusively entitled to any income, profit or gain arising from or attributable to the asset (including, in particular, any increase in the asset's value).

(2) For the purposes of subsection (1)(a) it is immaterial—

(a) whether or not the financial institution acquires its beneficial interest from the eventual owner,

(b) whether the eventual owner or another person other than the financial institution also has a beneficial interest in the asset, and

(c) whether or not the financial institution also has a legal interest in the asset.

(3) Subsection (1)(b)(v) does not prevent the eventual owner from granting an interest or right in relation to the asset to someone other than—

(a) the financial institution,

(b) a person controlled by the financial institution F6 ..., and

(c) a person controlled by a person who also controls the financial institutionF7 ...;

provided that the grant is not required by the financial institution or by arrangements to which the financial institution is party.

[F8 (3A) For the purposes of subsection (3) whether a person is controlled by another person is determined in accordance with section 840 of ICTA.]

(4) Subsection (1)(b)(vi) does not prevent the financial institution from having responsibility for, or a share in any loss arising out of, any reduction in the asset's value (and subsection (1)(b)(ii) is subject to this subsection).

(5) Payments by the eventual owner under arrangements to which this section applies are alternative finance return for the purposes of this Chapter except in so far as they amount to—

(a) payments of the kind described in subsection (1)(b)(ii), or

(b) payments in respect of any arrangement fee or legal or other costs or expenses which the eventual owner is required under the arrangements to pay.

(6) Arrangements to which this section applies shall not be treated as a partnership for the purposes of the Taxes Acts (within the meaning of the Taxes Management Act 1970).]

Textual Amendments

F5 S. 47A inserted (with effect in accordance with s. 96(8) of the amending Act) by Finance Act 2006 (c. 25), s. 96(3)

F6 Words in s. 47A(3)(b) repealed (6.4.2007) by Income Tax Act 2007 (c. 3), s. 1034(1), Sch. 1 para. 597(2)(a), Sch. 3 Pt. 1 (with Sch. 2)

F7 Words in s. 47A(3)(c) repealed (6.4.2007) by Income Tax Act 2007 (c. 3), s. 1034(1), Sch. 1 para. 597(2)(b), Sch. 3 Pt. 1 (with Sch. 2)

F8 S. 47A(3A) inserted (6.4.2007) by Income Tax Act 2007 (c. 3), s. 1034(1), Sch. 1 para. 597(3) (with Sch. 2)

48 Arrangements within section 47: foreign currency and non-residents U.K.

(1) If alternative finance return is paid in a currency other than sterling—

(a) by or to a person other than a company, and

(b) otherwise than for the purposes of a trade, profession or vocation or a property business,

then, as respects that person, the effective return for the purposes of section 47 and the appropriate amount for the purposes of subsection (7) of that section are to be calculated in the other currency and the amount of each payment of alternative finance return is to be translated into sterling at a spot rate of exchange for the day on which the payment is made.

(2) In section 148 of FA 2003 (meaning of “permanent establishment”) after subsection (5) insert—

“(5A) Where alternative finance return as defined by subsection (5) of section 47 of the Finance Act 2005 is paid to a company that is not resident in the United Kingdom, the company is not regarded as having a permanent establishment in the United Kingdom merely by virtue of anything done for the purposes of the arrangements falling within that section by the other party to the arrangements or by any other person acting for the company in relation to the arrangements.”

(3) In section 127 of FA 1995 (persons not treated as UK representatives) in subsection (1), at the end of paragraph (c) but before the “and” insert—

“(cc) where the income consists of alternative finance return, as defined by subsection (5) of section 47 of the Finance Act 2005, the other party to the arrangements falling within that section or any other person acting for the non-resident in relation to the arrangements;”.

[F9 48A Alternative finance arrangements: alternative finance investment bond: introduction U.K.

(1) Subject to section 52, arrangements fall within this section if—

(a) the arrangements provide for one person (“the bond-holder”) to pay a sum of money (“the capital”) to another (“the bond-issuer”),

(b) the arrangements identify assets, or a class of assets, which the bond-issuer will acquire for the purpose of generating income or gains directly or indirectly (“the bond assets”),

(c) the arrangements specify a period at the end of which they cease to have effect (“the bond term”),

(d) the bond-issuer undertakes under the arrangements—

(i) to dispose at the end of the bond term of any bond assets which are still in the bond-issuer’s possession,

(ii) to make a repayment of the capital (“the redemption payment”) to the bond-holder during or at the end of the bond-term (whether or not in instalments), and

(iii) to pay to the bond-holder other payments on one or more occasions during or at the end of the bond term (“additional payments”),

(e) the amount of the additional payments does not exceed an amount which would be a reasonable commercial return on a loan of the capital,

(f) under the arrangements the bond-issuer undertakes to arrange for the management of the bond assets with a view to generating income sufficient to pay the redemption payment and additional payments,

(g) the bond-holder is able to transfer the rights under the arrangements to another person (who thereby becomes the bond-holder),

(h) the arrangements are a listed security on a recognised stock exchange (within the meaning of section 1005 of ITA 2007), and

(i) the arrangements are wholly or partly treated in accordance with international accounting standards as a financial liability of the bond-issuer (or would be if the bond-issuer applied those standards).

(2) For the purposes of subsection (1)—

(a) the bond-issuer may acquire bond assets before or after the arrangements take effect,

(b) bond assets may be property of any kind, including rights in relation to property owned by someone other than the bond-issuer,

(c) the identification of the bond assets mentioned in subsection (1)(b) and the undertakings mentioned in subsection (1)(d) and (f) may (but need not) be described as, or accompanied by a document described as, a declaration of trust,

(d) a reference to the management of assets includes a reference to disposal,

(e) the bond-holder may (but need not) be entitled under the arrangements to terminate them, or participate in terminating them, before the end of the bond term,

(f) the amount of the additional payments may be—

(i) fixed at the beginning of the bond term,

(ii) determined wholly or partly by reference to the value of or income generated by the bond assets, or

(iii) determined in some other way,

(g) if the amount of the additional payments is not fixed at the beginning of the bond term, the reference in subsection (1)(e) to the amount of the additional payments is a reference to the maximum amount of the additional payments,

(h) the amount of the redemption payment may (but need not) be subject to reduction in the event of a fall in the value of the bond assets or in the rate of income generated by them, and

(i) entitlement to the redemption payment may (but need not) be capable of being satisfied (whether or not at the option of the bond-issuer or the bond-holder) by the issue or transfer of shares or other securities.

(3) An order under section 1005 of ITA 2007 (recognised stock exchanges: designation) may designate a stock exchange for the purposes of that section in its application for the purposes of this section only.]

Textual Amendments

F9 Ss. 48A, 48B inserted (with effect in accordance with s. 53(13)(14) of the amending Act) by Finance Act 2007 (c. 11), s. 53(1)

[F9 48B Alternative finance arrangements: alternative finance investment bond: effects U.K.

(1) Additional payments under arrangements falling within section 48A are alternative finance return for the purpose of this Chapter (subject to the provisions in section 51A about the treatment of discount).

(2) For the purposes of an enactment about any tax (and irrespective of the position for other purposes)—

(a) a bond-holder shall not be treated as having a legal or beneficial interest in the bond assets,

(b) the bond-issuer shall not be treated as a trustee of the bond assets,

(c) profits and gains accruing to the bond-issuer in connection with the bond assets are profits and gains of the bond-issuer and not of the bond-holder (and do not arise to the bond-issuer in a fiduciary or representative capacity),

(d) payments made by the bond-issuer by way of redemption payment or additional payment are not made in a fiduciary or representative capacity, and

(e) a bond-holder shall not be entitled to relief for capital expenditure in connection with bond assets.

(3) Arrangements falling within section 48A are securities for the purposes of an enactment about any tax (including Chapters 1 to 5 of Part 7 of ITEPA 2003); for which purpose—

(a) a reference to redemption shall be taken as a reference to making the redemption payment,

(b) a reference to interest shall be taken as a reference to alternative finance return, and

(c) for the purposes of section 84 the bond issuer shall be treated as being party as debtor to a capital market arrangement.

(4) Arrangements falling within section 48A are a corporate bond, issued on the date on which the arrangements are entered into, for the purposes of section 117 of TCGA 1992 (qualifying corporate bonds) if—

(a) the capital is expressed in sterling,

(b) the arrangements do not include provision for the redemption payment to be in a currency other than sterling,

(c) entitlement to the redemption payment is not capable of conversion (directly or indirectly) into an entitlement to the issue of securities apart from other arrangements falling within section 48A, and

(d) the additional payments are not determined wholly or partly by reference to the value of the bond assets;

and section 117(2) shall have effect for the purposes of this subsection as for the purposes of section 117(1).

(5) Arrangements falling within section 48A shall not be treated—

(a) as a unit trust scheme for the purposes of TCGA 1992,

(b) as a unit trust scheme for the purposes of section 469 of ICTA or section 1007 of ITA 2007 (distributions),

(c) as an offshore fund for the purposes of Chapter 5 of Part 17 of ICTA (offshore funds), or

(d) as a relevant holding for the purposes of paragraph 4 of Schedule 10 to FA 1996 (loan relationships: collective investment schemes).

(6) A bond-issuer is not a securitisation company for the purposes of section 83 (unless it is one by virtue of arrangements which do not fall within section 48A).

(7) For the purposes of section 417 of ICTA (close companies)—

(a) a bond-holder is a loan creditor in respect of the bond-issuer;

(b) arrangements falling within section 48A shall be disregarded in the application of section 417(1)(d).

(8) For the purposes of Schedule 18 to ICTA (group relief)—

(a) a bond-holder is a loan creditor in respect of the bond-issuer;

(b) paragraph 1(5)(b) shall be disregarded in determining whether a person is an equity holder by virtue of arrangements falling within section 48A.]

Textual Amendments

F9 Ss. 48A, 48B inserted (with effect in accordance with s. 53(13)(14) of the amending Act) by Finance Act 2007 (c. 11), s. 53(1)