Part 3

Income tax, corporation tax and capital gains tax
Chapter 2

Other provisions

Loan relationships

Convertible securities etc: loan relationships
72
1
Section 92 of the Finance Act 1996 (c. 8) (convertible securities etc) is amended as follows.
2
Amend subsection (1) (the assets to which section 92 applies) in accordance with subsections (3) to (9).
3
In paragraph (b) (which requires the asset to carry rights to acquire any shares in a company) for “any shares in a company” substitute “shares in a company”.
4
After paragraph (b) insert—
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;
.
5
In paragraph (c) (extent to which shares may be acquired under that provision not to be determined using specified cash value) for “that provision”, where first occurring, substitute “any such provision”.
6
In paragraph (d) (asset not to be a relevant discounted security within the meaning of Schedule 13 to the Finance Act 1996) after “Act” insert “or an excluded indexed security within the meaning of that Schedule”.
7
After paragraph (d) insert—
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;
.
8
In paragraph (e) (more than negligible likelihood of the right to acquire shares being exercised to significant extent)—
a
for “the right” substitute “the rights”, and
b
omit “and”.
9
After paragraph (e) insert—
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
.
10
After subsection (1) insert—
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.
.
11
After subsection (1C) insert—
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.
.
12
In consequence of the amendments made by this section and sections 73 and 74, the sidenote becomes “Convertible securities etc: creditor relationships”.
13
The amendments made by this section do not have effect for the purpose of determining, in relation to such part of an accounting period as falls before 26th July 2001, whether an asset is, or has ceased to be, an asset to which section 92 of the Finance Act 1996 (c. 8) applies.
14
Subsection (15) has effect where—
a
an asset is, immediately before 26th July 2001, an asset to which section 92 of the Finance Act 1996 applies, but
b
on that date, by virtue only of the amendments of that section made by this section, the asset ceases to be an asset to which that section applies.
15
Where this subsection has effect, the asset shall be taken to have ceased immediately before 26th July 2001 to be an asset to which section 92 of the Finance Act 1996 (c. 8) applies and, accordingly, any deemed disposal and re-acquisition under subsection (7) of that section shall be treated as having taken place immediately before that date.
16
Subject to subsections (13) to (15), the amendments made by this section have effect for accounting periods ending on or after 26th July 2001 in relation to any asset representing a creditor relationship of a company, unless the creditor relationship in question is one to which the company ceased to be a party before that date.