Deep Gain Securities (Hansard, 12 November 1991)

§ Mr. Maude

The deep gain legislation provides a tax regime for bonds which are issued at a discount to par but which cannot be taxed according to the deep discount rules. The deep gain rules charge all of an investor's return to income tax. However, it has recently been brought to our attention that many ordinary bonds, carrying a full coupon, and issued at a small discount to par, but not containing the characteristics of true deep gain securities are, in strictness, so classified if they contain standard event of default or event risk clauses.

We have therefore decided to restore the position to what everyone previously believed it to be: bonds already in issue which are deep gain securities solely by virtue of the inclusion of standard event of default or event risk clauses will be treated as not being deep gain securities. We intend to introduce legislation in the next Finance Bill to take these bonds out of the deep gains legislation.

In the meantime, and with my agreement, the Inland Revenue will not treat securities issued on or before 12 November 1991 as deep gain securities where they fall to be so treated only by reason of a redemption which may be made before maturity, and that redemption is —outside the scope of paragraph 1(3A), Schedule 11, Finance Act 1989, or of paragraph 2(13) of that Schedule, as the case may be; and —occasioned by the happening of an event (other than the exercise of a put option) prescribed in the terms of issue of the security as an event on the happening of which the security will or may be redeemed.

This concession may not be applied if the terms of the security as respects the events occasioning such redemptions before maturity are materially amended after 12 November 1991.

For tranche issues, securities issued after 12 November 1991 will be treated as not being deep gain securities if they fall to be so treated only by reason of a redemption which may be made before maturity if they are issued under the same prospectus as a security described above or on terms such as to make them fungible, either immediately or after the first payment of interest in respect of the security, with a security described above.

The Government also intend to set in place a new tax regime for bonds issued after today. The precise terms of the legislation covering these bonds will depend on the outcome of consultations which the Inland Revenue will be undertaking with interested parties. But the Government's intention is that securities issued after today will not fall to be treated as deep gain securities only by reason of a redemption which may be made before maturity in pursuance of a term of issue of the security and —the term provides that the security will or may be redeemed on the happening, before maturity, of an event which is not at the time of issue certain or likely to occur; —if the security provides for early redemption on the happening of more than one such event, it is not at the time of issue certain or likely that any one or more of them will occur; —the term is such as to protect the holders of the security against the consequences of the event prescribed; and 509W —a reduction in tax liability is not a main benefit to be expected from the inclusion of the term and in particular, is not an arrangement, or part of an arrangement to facilitate early redemption of the security.

The Government propose that this amendment should not operate to remove any transfer or redemption of a security from the charge on deep gains when —the security would be a deep gain security but for the proposals described above; —the security is redeemed before maturity on the happening of an event described above; and —the security is held on redemption by a person connected with the issuer, or as the case may be the transfer is by such a person within 12 months before the redemption.

In the meantime, in anticipation of such legislation, and with my agreement, the Inland Revenue will, by concession, not enforce liabilities in respect of transactions in securities which are strictly deep gain securities under current law, but would not be were legislation on these lines in effect.