Income and Corporation Taxes Act 1988 (c. 1)

SCHEDULES

Section 57.

SCHEDULE 4 DEEP DISCOUNT SECURITIES

Interpretation

1 (1) For the purposes of this Schedule—

(a) “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;

(b) “the amount payable on redemption” does not include any amount payable by way of interest;

(c) “a deep discount”, in relation to any redeemable security, means a discount which—

(i) represents more than 15 per cent. of the amount payable on redemption of that security; or

(ii) is 15 per cent. or less, but exceeds half Y per cent. of the amount so payable (where Y is the number of complete years between the date of issue of the security and the redemption date);

(d) subject to sub-paragraph (2) below, “a deep discount security” means any redeemable security which has been issued by a company, after 13th March 1984, at a deep discount, other than—

(i) a share in the company;

(ii) a security in respect of which the amount payable on redemption is determined by reference to the movement of the retail prices index or any similar general index of prices which is published by, or by an agent of, the government of any territory outside the United Kingdom; or

(iii) a security the whole or part of which, by virtue of section 209(2)(c), is a “distribution”;

(e) “a discount” means any amount by which the issue price of a redeemable security is less than the amount payable on redemption of that security;

(f) “income period” means —

(i) 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

(ii) 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 the issue or on such an anniversary and ends on the redemption date;

(g) “the redemption date” in relation to any redeemable security, means the earliest date on which, under the terms on which the security is issued, the holder of the security will be entitled to require it to be redeemed by the company which issued it;

(h) “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—

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

(ii) 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; and

(j) “chargeable security” has the meaning given by paragraph 2(5) below.

(2) Where securities which were issued on or before 13th March 1984 have been exchanged at any time after that date for new securities which would be deep discount securities but for this sub-paragraph, the new securities shall not be treated as deep discount securities if—

(a) the old securities would not have been deep discount securities if they had been issued after 13th March 1984;

(b) 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 old securities; and

(c) the amount payable on redemption of the new securities does not exceed the amount which would have been payable on redemption of the old securities.

(3) For the purposes of this Schedule, a security comprised in any letter of allotment or similar instrument shall be treated as issued unless the right to the security conferred by the letter or instrument remains provisional until accepted, and there has been no acceptance.

Charge to tax after acquisition of certain securities

2 (1) This sub-paragraph applies to deep discount securities issued by a company on or after 19th March 1985 where one or both of the following applies—

(a) immediately before the issue the assets held by the company included relevant securities with a value equal to at least 75 per cent

of the value of all the assets held by it;

(b) the terms of issue of the deep discount securities are determined by the company by reference to (though not necessarily in such a way that they reflect) the terms of issue of relevant securities which are held by the company when the deep discount securities are issued or which it intends to acquire later.

(2) This sub-paragraph applies to deep discount securities issued by a company where—

(a) sub-paragraph (1) above would apply if the references to relevant securities included references to United Kingdom corporate bonds; and

(b) the company acquired those bonds on or after their issue (by another company) in circumstances where sub-paragraph (1) above would have applied if they had been deep discount securities.

(3) This sub-paragraph applies to deep discount securities of a particular kind issued by a company and in the case of which—

(a) neither of the preceding sub-paragraphs applies; and

(b) at any time in the first income period of the securities of that kind the assets held by the company include relevant securities with a value equal to at least 75 per cent. of the value of all the assets held by it.

(4) This sub-paragraph applies to deep discount securities issued by a company where either—

(a) they are issued on a conversion to which section 82 of the 1979 Act applies of old securities; or

(b) they are issued by a company in exchange for old securities in circumstances in which section 85(3) of the 1979 Act applies or are treated as so issued by virtue of section 86(1) of that Act;

and in this sub-paragraph “old securities” means deep discount securities to which sub-paragraph (1), (2) or (3) above or this sub-paragraph applies, except that securities to which sub-paragraph (3) above applies are not old securities unless sub-paragraph (3)(b) has been fulfilled in their case by the time the conversion or exchange concerned takes place.

(5) In the following provisions of this Schedule “chargeable security” means a deep discount security to which any of the preceding sub-paragraphs applies.

(6) In this paragraph—

• “relevant securities” means securities within the meaning of section 710, but excluding United Kingdom corporate bonds;

• “terms of issue” includes terms relating to amounts payable on redemption or by way of interest, or to times of payment of such amounts; and

• “value” in relation to assets means the price they might reasonably be expected to fetch on a sale in the open market.

(7) For the purposes of this paragraph—

(a) a company holds assets if it has a beneficial interest in them and acquires them if it acquires such an interest in them; and

(b) securities are of the same kind if they are treated as being of the same kind by the practice of a stock exchange, or would be so treated if dealt with on a stock exchange.

(8) In this paragraph “United Kingdom corporate bonds” means securities—

(a) issued by a company resident in the United Kingdom at the time of issue;

(b) the debt on which represents and has at all times represented a normal commercial loan, as defined in paragraph 1(5) of Schedule 18; and

(c) which are expressed in sterling and in respect of which no provision is made for conversion into, or redemption in, a currency other than sterling.

(9) For the purposes of sub-paragraph (8)(c) above—

(a) a security shall not be regarded as expressed in sterling if the amount of sterling falls to be determined by reference to the value at any time of any other currency or asset; and

(b) a provision for redemption in a currency other than sterling but at the rate of exchange prevailing at redemption shall be disregarded.

3 (1) Where a person acquires a chargeable security, the chargeable amount shall be treated as income chargeable to tax under Case III or IV (as the case may be) of Schedule D on each of the following occasions—

(a) the end of each income period to fall within the period of ownership;

(b) the end of any income period which ends but does not begin in the period of ownership.

(2) In sub-paragraph (1) above “the chargeable amount” means—

(a) where paragraph (a) applies, an amount equal to the income element for the income period;

(b) where paragraph (b) applies, an amount equal to the income element for the part of the income period falling within the period of ownership.

(3) The income chargeable shall (notwithstanding anything in sections 64 to 67) be taken into account in computing tax charged for the year of assessment in which the occasion concerned occurs.

Charge to tax on disposal of securities

4 (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”), less any amount or amounts treated as income by virtue of paragraph 3 above, shall be treated as income chargeable to tax under Case III or, as may be, Case IV of Schedule D; and

(b) the tax shall (notwithstanding anything in sections 64 to 67 but subject to sub-paragraph (5) below) be computed on the income so arising from any disposal made in the year of assessment.

(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 sub-paragraph (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 (6) to (9) of section 65 shall apply as they apply for the purposes of subsection (5) of that section.

(7) Sections 348 to 350 and 123 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.

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

5 (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 338(1), 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) at least one of the conditions mentioned in sub-paragraph (4) below is satisfied.

(4) The conditions are—

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

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

(c) that the company is an investment company.

(5) Where, on redemption of any deep discount security, any part of the amount payable on redemption is, by virtue of section 209(2)(d) and (e), a distribution of the company, sub-paragraphs (1) and (2) above shall not apply to any income element in respect of that security.

(6) 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.

(7) In sub-paragraph (6) above “relief” means relief by way of deduction in computing profits or gains or deduction or set-off against income or total profits; and where the relief is claimed by virtue of section 403(7) any question under this paragraph as to what benefit might be expected to accrue from the transaction in question shall be determined by reference to the claimant company and the surrendering company taken together.

6 (1) Section 494 shall apply in relation to income elements in respect of deep discount securities and paragraph 5 above as it applies in relation to interest and section 338.

(2) In the application of section 494 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.

Disposals

7 (1) Subject to sub-paragraphs (2) and (3) 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 Act.

(2) Notwithstanding anything in section 49(1)(b) of that Act (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.

(3) In any case where—

(a) there is a conversion of securities to which section 82 of the 1979 Act 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,

then the securities converted or exchanged shall (subject to sub-paragraph (4) below and notwithstanding section 78 of that Act) be treated for the purposes of the charge to tax under paragraph 4 above as having been disposed of immediately before the time of the conversion, or, as the case may be, the exchange, by the person who was the beneficial owner of the securities at that time.

(4) Where a person would (but for this sub-paragraph) be treated by sub-paragraph (3) above as having, for the purposes of paragraph 4 above, disposed of deep discount securities, other than chargeable 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.

8 (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.

Securities issued and owned by associated companies or group companies

9 (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 416) of the issuing company; or

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

paragraph 5(1) and (2) above 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

10 (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,

paragraph 5(1) and (2) above 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 5(1) above, to deduct from its total profits for any accounting period shall be treated for the purposes of section 423 as if it were interest paid by the company in that period.

(4) In this paragraph—

• “associate” has the meaning given in section 417(3) and (4);

• “control” shall be construed in accordance with section 416(2) to (6); and

• “participator” means a person who is, in relation to a company, a participator for the purposes of Part XI (by virtue of section 417) 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

11 (1) Where any deep discount security is redeemed before the redemption date by the company which issued it, paragraphs 4, 5, 7(1) and (2) and 8 to 10 above 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;

and, if in either case paragraph 3 above applies, less also an amount equal to the chargeable amount (within the meaning of that paragraph).

(3) The deduction allowed under paragraph 5(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 9 or 10 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.

Identification of securities disposed of

12 The rules contained in section 88 of the Finance [1982 c. 39.] 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.

Information

13 (1) 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.

(2) Every company which issues a chargeable security to which paragraph 2(1), (2) or (4) above applies shall cause to be shown on the certificate of each such security the fact that tax is chargeable under paragraph 3 above.

Charities

14 A charity shall be exempt from income tax in respect of an amount which (apart from this paragraph) is chargeable to income tax by virtue of this Schedule if the amount is applicable and applied for charitable purposes.

In this paragraph “charity” has the same meaning as in section 506.