Finance Act 1984 (c. 43)

SCHEDULES

Section 36(1).

SCHEDULE 9 DEEP DISCOUNT SECURITIES

Charge to tax

1 (1) On the disposal by any person of any deep discount security—

(a) an amount which represents the accrued income attributable to the period between his acquisition and disposal of the security (the " period of ownership") shall be treated as income chargeable to tax under Case III or, as may be, Case IV of Schedule D ;

(b) the tax shall (notwithstanding anything in sections 119 to 121 or, as may be, 122 to 124 of the Taxes Act but subject to sub-paragraph (5) below) be computed on the income so arising from any disposal made in the year of assessment ; and

(c) in computing the gain accruing on the disposal for the purposes of capital gains tax—

(i) section 31 of the [1979 c. 14.] Capital Gains Tax Act 1979 shall not apply but the consideration for the disposal shall be treated as reduced by the amount mentioned in paragraph (a) above ; and

(ii) where that amount exceeds the consideration for the disposal, the amount of the excess shall be treated as expenditure within section 32(1)(b) of that Act incurred by him on the security immediately before the disposal.

(2) The amount which represents the accrued income attributable to any period of ownership is the aggregate of the income elements for each income period or part of an income period in the period of ownership.

(3) In relation to any security, the income element for any income period shall be determined by applying the formula—

where

• A is the adjusted issue price ;

• B is the yield to maturity; and

• C is the amount of interest (if any) attributable to the income period.

(4) The income element for any period (the "short period") falling within an income period shall be determined by applying the formula—

where

• I is the income element for the income period in which the short period falls ;

• P is the number of days in the short period ; and

• Y is the number of days in that income period.

(5) Where—

(a) by virtue of sub-paragraph (1) above income tax is chargeable under Case IV of Schedule D, and

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

the tax shall be computed on the amounts, if any, received in the United Kingdom in the year of assessment in question in respect of the sum mentioned in sub-paragraph (1)(a) above (any such amounts being treated as income arising when they are received in the United Kingdom).

(6) For the purposes of subsection (5) 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 (4) to (7) of section 122 of the Taxes Act shall apply as they apply for the purposes of subsection (3) of that section.

(7) In this Schedule—

• " adjusted issue price ", in relation to any security in a particular income period, is the aggregate of the issue price of the security and the income elements for all previous income periods;

• " income period " means—

  (a)

  in the case of a security carrying a right to interest, any period to which a payment of interest which falls to be made in respect of the security is attributable; and

  (b)

  in any other case, any year ending immediately before the anniversary of the issue of the security or any period of less than a year which begins on such an anniversary and ends on the redemption date ;

• "yield to maturity", in relation to any security, means a rate (expressed as a percentage) such that if a sum equal to the issue price of the security were to be invested at that rate on the assumption that—

  (a)

  the rate would be applied on a compounding basis at the end of each income period ; and

  (b)

  the amount of any interest attributable to an income period would be deducted after applying the rate, the value of that sum at the redemption date would be equal to the amount payable on redemption of the security.

(8) Every company which issues deep discount securities shall cause to be shown on the certificate of each such security the income element for each income period between the date of issue of the security and the redemption date.

(9) Sections 52 to 54 of the Taxes Act (deduction of income tax by persons making certain payments) and section 159 of that Act (foreign dividends) shall not apply to so much of the proceeds of redemption of a deep discount security as represents income chargeable to tax under Case III or, as may be, Case IV of Schedule D.

Meaning of " disposal"

2 (1) Subject to sub-paragraph (2) and paragraph 8 below, there is a disposal of a deep discount security for the purposes of this Schedule if there would be such a disposal for the purposes of the [1979 c. 14.] Capital Gains Tax Act 1979.

(2) Notwithstanding anything in section 49(1)(b) of the Act of 1979 (no deemed disposal on death), where the assets of which a deceased person was competent to dispose include any deep discount security that security shall, for the purposes of this Schedule, be deemed to have been disposed of by the deceased immediately before his death.

Deduction of income element from total profits of company and allowance as charge on income

3 (1) In computing the corporation tax chargeable for any accounting period of a company which has issued any deep discount security, the income element in respect of that security for any income period ending in or with that accounting period shall be allowed as a deduction against the total profits of the company for the accounting period as reduced by any relief other than group relief.

(2) The income element for any income period ending in or with an accounting period of a company which has issued a deep discount security shall be treated for the purposes of the Corporation Tax Acts, other than those of section 248(1) of the Taxes Act (which makes provision, in relation to charges, similar to that made by sub-paragraph (1) above) as a charge on income paid by the company in the accounting period.

(3) No income element in respect of any deep discount security shall be so allowed or treated unless—

(a) the cost of paying so much of the amount payable on redemption as represents the discount is ultimately borne by the company;

(b) the income element would not otherwise be deductible in computing the issuing company's profits or any description of those profits for purposes of corporation tax ; and

(c) one or more of the conditions mentioned in sub-paragraph (4) below are satisfied.

(4) The conditions are that—

(a) the company exists wholly or mainly for the purpose of carrying on a trade ;

(b) the deep discount security was issued wholly and exclusively to raise money for purposes of a trade carried on by the company;

(c) the company is an investment company, as defined by section 304(5) of the Taxes Act.

(5) Where, on redemption of any deep discount security any part of the amount payable on redemption is, by virtue of section 233(2)(d) of the Taxes Act, a distribution of the company for the purposes of the Corporation Tax Acts, sub-paragraphs (1) and (2) above shall not apply to any income element in respect of that security.

(6) Without prejudice to its application apart from this paragraph section 38 of the [1980 c. 48.] Finance Act 1980 (incidental costs of obtaining loan finance to be deductible in computing profits or gains to be charged under Case I or Case II of Schedule D and to be treated for certain purposes as expenses of management) shall apply in relation to any qualifying security as it applies in relation to loan stock the interest on which is deductible as mentioned in subsection (2) of that section.

(7) In sub-paragraph (6) above, " qualifying security " means any deep discount security in respect of which the income elements are deductible under sub-paragraph (1) above in computing the total profits of the company by which the incidental costs in question are incurred.

(8) Sub-paragraphs (6) and (7) above shall have effect in relation to expenditure incurred after 13th March 1984.

(9) Relief shall not be given under any provision of the Tax Acts in respect of any income element if (at any time) a scheme has been effected or arrangements have been made such that the sole or main benefit that might be expected to accrue to the company from the issue of the security in question is the obtaining of a reduction in tax liability by means of that relief.

(10) Subsections (2) and (3) of section 38 of the [1976 c. 40.] Finance Act 1976 (restriction of relief for payment of interest) shall apply in relation to sub-paragraph (9) above as they apply in relation to subsection (1) of that section.

4 (1) Section 15 of the [1975 c. 22.] Oil Taxation Act 1975 (oil extraction activities etc. ; charges on income) shall apply in relation to income elements in respect of deep discount securities and paragraph 3 above as it applies in relation to interest and section 248 of the Taxes Act (allowance of charges on income).

(2) In the application of section 15 to any deep discount security, subsection (2)(b) shall have effect as if the references to the rate at which interest was payable were references to the aggregate of the rate of interest payable and the amount of any income element in respect of the security for the period in question.

Securities issued and owned by associated companies or companies belonging to same group

5 (1) Where a deep discount security issued by a company is at any time beneficially owned by another company which is—

(a) an associated company (within the meaning of section 302 of the Taxes Act) of the issuing company ; or

(b) a member of a group of companies of which the issuing company is also a member;

sub-paragraphs (1) and (2) of paragraph 3 of this Schedule shall apply to any linked income element with the addition, after the words " the accounting period ", of the words " in which the security is redeemed ".

(2) In this paragraph " linked income element" means the income element in respect of the security in question for any income period in which the security is at any time beneficially owned by the other company.

(3) For the purposes of this paragraph, two companies shall be deemed to be members of a group of companies if one is a 51 per cent subsidiary of the other or both are 51 per cent, subsidiaries of a third company.

Close companies

6 (1) Where a deep discount security issued by a close company is at any time beneficially owned by—

(a) a participator in the company ;

(b) an associate of such a participator ; or

(c) a company of which such a participator has control,

sub-paragraphs (1) and (2) of paragraph 3 of this Schedule shall apply to any linked income element with the addition, after the words " the accounting period ", of the words " in which the security is redeemed ".

(2) In sub-paragraph (1) above " linked income element" means the income element in respect of the security in question for any income period in which the security is at any time beneficially owned by a person mentioned in that sub-paragraph.

(3) Any amount which a close company is allowed, by virtue of paragraph 3(1) of this Schedule, to deduct from its total profits for any accounting period shall be treated for the purposes of paragraph 3A of Schedule 16 to the [1972 c. 41.] Finance Act 1972 (apportionment amongst participators of interest paid by close company as if it were income of the company) as if it were interest paid by the company in that period.

(4) In this paragraph—

• "associate" has the meaning given in section 303(3) of the Taxes Act;

• " control " shall be construed in accordance with section 302(2) to (6) of that Act; and

• " participator " means a person who is, in relation to a company, a participator for the purposes of Chapter III of Part XI of the Taxes Act (by virtue of section 303 of that Act) other than a person who is a participator for those purposes by virtue only of his holding a deep discount security issued by the company.

(5) In determining whether a person who carries on a business of banking is a participator in a company for the purposes of this paragraph, there shall be disregarded any securities of the company acquired by him in the ordinary course of his business.

Early redemption

7 (1) Where any deep discount security is redeemed before the redemption date by the company which issued it, the preceding paragraphs shall have effect subject to the provisions of this paragraph.

(2) The accrued income attributable to the period between the acquisition of the security by the person who, immediately before its redemption, was the beneficial owner of the security and its redemption shall be the amount paid to him on redemption of the security less the issue price of the security or, in a case where he did not acquire it on its issue, less the aggregate of—

(a) the issue price; and

(b) the accrued income attributable to the period beginning with the issue, and ending with his acquisition, of the security.

(3) The deduction allowed under paragraph 3(1) above in relation to the accounting period in which the deep discount security is redeemed shall be the amount paid by the company on redemption less the aggregate of—

(a) the issue price of the security; and

(b) the accrued income attributable to the period beginning with the issue of the security and ending with the last income period to end in or with the accounting period of the company which precedes that in which the security is redeemed.

(4) Where paragraph 5 or 6 above has applied to the deep discount security at any time, the amount mentioned in sub-paragraph (3)(b) above shall not include any linked income element (within the meaning of that paragraph).

(5) Where the aggregate mentioned in sub-paragraph (3) above exceeds the amount paid by the company on redemption of the security, the amount of the excess or, if it is less, the amount mentioned in paragraph (b) of that sub-paragraph shall be treated as income of the company—

(a) arising in the accounting period in which the security is redeemed; and

(b) chargeable to tax under Case VI of Schedule D.

(6) Where a resolution is passed, an order made or any other act takes place for the winding up of a company which has issued a deep discount security before the security is redeemed, this paragraph shall have effect in relation to any payment made in respect of the security in the course of the winding up as if the payment were made on redemption.

Reorganisations, conversions, reconstructions and amalgamations

8 (1) This paragraph applies where—

(a) there is a conversion of securities to which section 82 of the [1979 c. 14.] Capital Gains Tax Act 1979 applies and those securities include deep discount securities ; or

(b) securities including deep discount securities are exchanged (or by virtue of section 86(1) of that Act are treated as exchanged) for other securities in circumstances in which section 85(3) of that Act applies.

(2) Where this paragraph applies—

(a) the securities converted or exchanged shall (subject to sub-paragraph (3) below and notwithstanding section 78 of the Act of 1979) be treated for the purposes of the charge to tax under paragraph 1 of this Schedule as having been disposed of immediately before the time of the conversion, or, as the case may be, exchange, by the person who was the beneficial owner of the securities at that time ;

(b) sub-paragraph (1)(c) of that paragraph and section 31 of the Act of 1979 shall not apply, but any sum payable to the beneficial owner of the deep discount securities by way of consideration for their disposal (in addition to his new holding) shall be treated for the purposes of capital gains tax as reduced by the amount of the accrued income on which he is chargeable to income tax by virtue of paragraph (a) above ; and

(c) where that amount exceeds any such sum, the excess shall be treated as expenditure within section 32(1)(b) of that Act incurred by him on the security immediately before that time.

(3) Where a person would (but for this sub-paragraph) be treated by sub-paragraph (2)(a) above as having, for tie purposes of paragraph 1 of this Schedule, disposed of deep discount securities which are converted into, or exchanged for, other deep discount securities—

(a) he shall not be so treated—

(i) if the date which is the redemption date in relation to the new securities is not later than the date which was the redemption date in relation to the converted or exchanged securities ; and

(ii) no consideration is given for the conversion or exchange other than the new securities ; but

(b) the amount of the accrued income attributable to his period of ownership of the converted or exchanged securities (including any amount added by virtue of the previous operation of this paragraph) shall be added to the amount of the accrued income attributable to his period of ownership of the new securities.

Disposals on a no-gain J no-loss basis

9 Where a disposal of a deep discount security is to be treated for the purposes of capital gains tax as one on which neither a gain nor a loss accrues to the person making the disposal, the consideration for which the person acquiring the security would, apart from this paragraph, be treated for the purposes of capital gains tax as having acquired the security shall be increased by the amount mentioned in paragraph 1(1)(a) of this Schedule.

Time of disposal and acquisition where securities disposed of under contract

10 (1) Where any deep discount security is disposed of and acquired under a contract, the time at which the disposal and acquisition is made is the time at which the contract is made (and not, if different, the time at which the security is transferred).

(2) If the contract is conditional (and in particular if it is conditional on the exercise of an option) the time at which the disposal and acquisition is made is the time when the condition is satisfied.

Identification of securities disposed of

11 (1) The rules contained in sections 88 and 89 of the [1982 c. 39.] Finance Act 1982 (identification, for the purposes of capital gains tax, of securities disposed of) shall apply for the purposes of this Schedule as they apply for the purposes of capital gains tax.

(2) In paragraph 1(2) of Schedule 6 to the [1983 c. 28.] Finance Act 1983 (exclusion of certain securities from provisions relating to election for pooling for purposes of capital gains tax), there shall be added, after paragraph (a)— “; nor

(aa) deep discount securities (within the meaning of section 36 of the Finance Act 1984)”.

Exemption for charities

12 Section 360(2) of the Taxes Act (exemption for charities from tax on chargeable gains) shall apply in relation to tax chargeable by virtue of paragraph 1 above as it applies in relation to tax on chargeable gains.

Consequential amendments

13 In section 254 of the Taxes Act (1osses and charges etc. for which claim to set-off against surplus of franked investment income may be made), the words " or paragraph 3 of Schedule 9 to the Finance Act 1984 " shall be inserted—

(a) at the end of paragraph (b) in subsection (2); and

(b) after the words " 248 of this Act " in subsection (7)(b).

14 In Schedule 10 to the [1975 c. 7.] Finance Act 1975 (capital transfer tax: valuation) in paragraph 9 (value transferred on death) at the end of sub-paragraph (1) there shall be added the words “and

(f) allowance shall be made for any liability to income tax arising under paragraph 1 of Schedule 9 to the Finance Act 1984 (deep discount securities) on a disposal which is deemed to occur by virtue of paragraph 2(2) of that Schedule.”