DEEP GAIN SECURITIES

HC Deb 12 July 1989 vol 156 cc1064-6

Mr. Lilley

I beg to move amendment No. 79, in page 215, line 44, at end insert— '(2A) For the purposes of sub-paragraph (2) above "redemption" does not include any redemption which may be made before maturity only at the option of the person who issued the security (and no other person).'

Mr. Deputy Speaker

With this it will be convenient to take Government amendments Nos. 83 and 84.

Mr. Lilley

The amendment arises from a commitment made by the Government in Committee to ensure that a security is not treated for tax purposes as a deep gain security simply because its terms of issue give the issuer the option to redeem it before its stated maturity.

Such options for the issuer to redeem the bond early—or call options, as they are often known—will usually involve the payment of either a fixed premium or an amount linked to the market value of some other comparable security. The idea is to compensate the lender for the dislocation of his investment and to allow him to invest in an instrument with a yield at least as attractive as the one which is being redeemed early. However, where this premium is great enough to constitute a deep gain—or is not known for certain but could be great enough—the security is classified as a deep gain security. It is then taxed according to the provisions of schedule 11, as currently drafted.

Issuer options of this kind are features of a wide range of bonds, some of which are in other respects deep gain securities but many of which are not, including some convertibles and some straight bonds issued at par or a shallow discount. Such options are outside the control of the investor.

Following the publication of the Finance Bill, we received a number of representations about the nature of such bonds. We came to the conclusion that in this respect the provisions of schedule 11 had been cast too wide and that it would not be right for a bond to be taxed as a deep gain security solely because of its issuer options.

The amendment ensures that options for the issuer to redeem a bond before its stated maturity are disregarded in determining whether it is a deep gain security. This means that a bond will not be a deep gain security for tax purposes if it has no other feature which would make it one. If, on the other hand, it is a deep gain security for some reason other than its issuer options—for example, it is issued at a deep discount and has a variable coupon—it will fall squarely within schedule 11. I hope that that is clear to the House.

Amendment agreed to.

Amendments made: No. 80, in page 215, line 49, leave out 'and' and insert— '(cc) is not a convertible security, and'.

No. 81, in page 216, line 37, leave out 'or'.

No. 82, in page 216, line 42, at end insert 'or (c) the security was issued before 9th June 1989 and was quoted in the official list of a recognised stock exchange on 8th June 1989, and under the terms of issue the amount payable on redemption is determined by reference to the movement of a published index of prices of shares quoted in the official list of a recognised stock exchange.'.

No. 83, in page 217, line 12, leave out from 'applied' to 'it' in line 13 and insert 'to determine the amount payable on redemption or to determine interest'.

No. 84, in page 217, line 40, at end insert— '(8A) For the purposes of sub-paragraph (5) above "redemption" does not include any redemption which may be made before maturity only at the option of the person who issued the security (and no other person).'.

No. 85, in page 217, line 50, at end insert— '(9A) In a case where the terms of issue contain provision for the amount payable on redemption to be not less than an amount stated in the terms, the provision shall not prevent the fourth condition being fulfilled if—

1. (a) the security was issued before 9th June 1989, and
2. (b) the amount stated does not constitute a deep gain (within the meaning given by paragraph 1(8) above).

(9B) In a case where—

1. (a) the terms of issue contain provision for the amount payable on redemption in any of the qualifying circumstances (set out in sub-paragraph (10) below) to be not less than an amount stated in the terms, and
2. (b) the security was issued before 9th June 1989,

the provision shall not prevent the fourth condition being fulfilled.'.

No. 86, in page 218, line 1, leave out 'sub-paragraph (7)' and insert `sub-paragraphs (7) and (9B)'.

No. 87, in page 218, line 9, at end insert— '(d) the security was issued by a company before 9th June 1989 and a person gains control of the company in pursuance of the acceptance of an offer made by that person to acquire shares in the company.'.

No. 88, in page 218, line 15, at end insert— `(13) For the purposes of this paragraph "control" (in relation to a company) shall be construed in accordance with section 840 of the Taxes Act 1988.'

No. 89, in page 218, line 15, at end insert—

'Convertible securities

2A.—(1) For the purposes of paragraph 1 above a security is a convertible security if—

1. (a) it was issued by a company before 9th June 1989,
2. (b) under the terms of issue it can be converted into or exchanged for share capital in a company (whether or not the company is the one which issued the security), and
3. (c) the condition set out in sub-paragraph (2) below is fulfilled.

(2) The condition is that—

1. (a) at some time in the qualifying period the security was quoted in the official list of a recognised stock exchange,
2. (b) at some time in that period relevant share capital was so quoted, or
3. (c) each of paragraphs (a) and (b) above is satisfied (though not necessarily as regards the same time).

(3) For the purposes of sub-paragraph (2) above the qualifying period is the period of one month beginning with the day on which the security was issued; (4) For the purposes of sub-paragraph (2) above relevant share capital is share capital in the company into whose share capital the security can be converted or for whose share capital the security can be exchanged; and relevant share capital need not be share capital into or for which the security can be converted or exchanged. (5) References in this paragraph to share capital are to share capital by whatever name called.'.—[Mr. Norman Lamont.]