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The Exchange Gains and Losses (Deferral of Gains and Losses) Regulations 1994

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Settlement and replacement of debts

2.—(1) This regulation applies where—

(a)a debt held or owed by a company (“the original debt”) under which a long-term capital asset or liability (“the original asset or liability”) subsists is settled and replaced to any extent by another debt (“the replacement debt”) under which another such asset or liability (“the replacement asset or liability”) subsists, and

(b)(apart from this regulation) an exchange gain or loss accrues to the company for an accrual period (“the settlement period”) as respects the original asset or liability which (where the debt is not wholly settled) is attributable to that part of the debt by which its nominal amount is decreased;

and in these Regulations “the replacement debt date” is the date on which that company becomes entitled or subject to the replacement debt.

(2) Subject to paragraph (6) below, in any case where this regulation applies—

(a)if the settlement period is the last accrual period as respects the original asset or liability, subject to paragraph (3) below, any exchange gain or loss which accrued for that period as respects that asset or liability shall be deemed to be unrealised, and any such exchange gain shall be deemed not to accrue as respects that asset or liability for that period;

(b)if the settlement period is not the last accrual period as respects the original asset or liability, subject to paragraph (3) below, any exchange gain which accrued for that period as respects that asset or liability shall be deemed not to accrue as respects that asset or liability for that period;

(c)an amount equal to the amount of any exchange gain falling within sub-paragraph (a) or (b) above shall be deemed to be an exchange gain accruing as respects there placement asset or liability for its first accrual period and section 143(2) shall not apply in relation to any gain deemed to accrue by this sub-paragraph;

and sections 139 to 143 (apart from section 143(7)) shall have effect accordingly.

(3) Paragraph (2) does not apply—

(a)in relation to any debt unless it falls within paragraph (10) or (11) below;

(b)in relation to any debt unless the replacement debt date falls in the period beginning 30 days before the date on which the original debt or part of the original debt was settled and ending 30 days after that date;

(c)in relation to any debt as the replacement debt as respects another debt if or to the extent that, for the purposes of this regulation and sections 139 to 143, it replaces a third debt.

(4) Where this regulation applies and the amount by which the original debt is settled exceeds the amount of the replacement debt, then the exchange gain referred to in paragraph (1)(b) above shall be apportioned according to the proportion which that excess bears to the amount by which that debt is replaced, and paragraph (2) shall not apply to so much of the exchange gain as corresponds to the excess.

(5) In any case where paragraph (2) above applies and the replacement debt date falls in one accounting period and the settlement of the whole or part of the original debt occurred in a later accounting period, then the reference in paragraph (2)(c) above to the first accrual period for the replacement debt shall be construed as a reference to the accrual period forthat debt which falls within that later accounting period.

(6) In any case where paragraph (2) above would (but for this paragraph) apply and the settlement of the original debt occurred in one accounting period and the replacement debt date falls in a later accounting period, then that paragraph shall not apply but—

(a)if the settlement period is the last accrual period for the asset or liability in question, the exchange gain or loss shall be deemed to be unrealised, and

(b)for the purposes of making a claim under section 139 as respects the original debt (or so much of it as is replaced) and the earlier accounting period—

(i)the first accrual period for the replacement debt shall be taken to be the second accrual period for the original debt, and

(ii)section 143(2) shall not apply; and

(c)references in section 140(4) to (9) to the asset or liability shall be construed as references to the replacement asset or liability;

and sections 139 to 143 (apart from section 143(7)) shall have effect accordingly.

(7) For the purposes of paragraph (3)(c) above—

(a)if the whole or part of the original debt is settled but there is more than one new debt held or owed by the company which may be taken to be the replacement debt, then the first of those new debts to which the company became entitled or subject shall be taken to replace the original debt and any later debt may only be taken to replace the original debt if and to the extent that the amount replaced of the original debt exceeds the amount of the earlier debt, and

(b)if there is more than one debt which another debt could be taken to replace, that other debt shall be taken to replace the debt which was settled first and shall only be taken to replace the debt settled later if and to the extent that its amount exceeds the amount of the debt settled earlier.

(8) The company may notify the inspector that it wishes one debt to be taken to replace another debt otherwise than in accordance with paragraph (7) above (but subject to paragraph (3)), and if the inspector is (or on appeal the Commissioners are) satisfied that the first mentioned debt in fact replaced the other debt, paragraph (7) shall not apply and that debt shall be taken to replace the other debt in accordance with the notice.

(9) Where paragraph (6), (7) or (8) above applies all such apportionments of gains shall be made for the purposes of this regulation and sections 139 to 143 as may be just and reasonable.

(10) A debt falls within this paragraph if—

(a)the maximum amount of the principal is specified at the commencement of the term of the debt and the principal cannot be increased beyond that maximum amount (except as mentioned in sub-paragraph (c) below), and

(b)any part of the principal once repaid cannot be redrawn, and

(c)any interest which, if not paid when due, is to be capitalised or rolled-up, is to be added to the principal on the due date and repayable on the same terms as the principal.

In determining whether a debt falls within this paragraph there shall be disregarded any term in so far as it provides for the principal or any interest to be calculated by reference to any withholding or other tax (including foreign tax).

(11) A debt falls within this paragraph if—

(a)it is a debt on a deep gain security for the purposes of paragraph 1 of Schedule 11 to the Finance Act 1989(1) and the amount payable on redemption is payable on one specified date, or

(b)it is a debt on a qualifying indexed security for the purposes of that paragraph, or

(c)it is a debt on a deep discount security for the purposes of paragraph 1 of Schedule 4 to the Income and Corporation Taxes Act 1988(2);

and for the purposes of this regulation the amount of any such debt on the replacement debt date shall be taken to be equal to its basic valuation.

(1)

1989 c. 26.Paragraph 1 of Schedule 11 was amended by paragraph 19(6) of Schedule 10 to the Taxation of Chargeable Gains Act 1992 (c. 12) and by paragraph 2 of Schedule 7 to the Finance (No.2) Act 1992 (c. 48).

(2)

1988 c. 1.Paragraph 1 of Schedule 4 was amended by paragraph 2 of Schedule 10 to the Finance Act 1989, by section 59 of, and paragraph 26 of Schedule 10 to, the Finance Act 1990 (c. 29) and by paragraph 14(57) of Schedule 10 to the Taxation of Chargeable Gains Act 1992.

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