Finance Act 1996

12(1)Subject to paragraph 15 below, this paragraph applies where, as a result of—U.K.

[F1(a)a related transaction between two companies that are—

(i)members of the same group, and

(ii)within the charge to corporation tax in respect of that transaction,

(b)a series of transactions having the same effect as a related transaction between two companies each of which—

(i)has been a member of the same group at any time in the course of that series of transactions, and

(ii)is within the charge to corporation tax in respect of the related transaction,]

[F2(c)a transfer between two companies of business consisting of the effecting or carrying out of contracts of long-term insurance which has effect under an insurance business transfer scheme;]

(d)any transfer between two companies which is a qualifying overseas transfer within the meaning [F3given by the definition treated as inserted into section 431(2) of the Taxes Act 1988 by paragraph 6(9) of Schedule 19AC to that Act] (transfer of business of overseas life insurance company),

one of those companies (“the transferee company”) directly or indirectly replaces the other (“the transferor company”) as a party to a loan relationship.

[F4(2)For the purpose of determining the credits and debits to be brought into account for the purposes of this Chapter in respect of the loan relationship—

(a)for the accounting period in which the transaction or, as the case may be, the first of the series of transactions takes place, the transferor company shall be treated as having entered into that transaction for a consideration equal to the notional carrying value of the asset or liability representing the relationship; and

(b)for any accounting period in which it is a party to the relationship, the transferee company shall be treated as if it had acquired the asset or liability representing the relationship for a consideration equal to the notional carrying value of the asset or liability.

For the purposes of this sub-paragraph, the notional carrying value is the amount that would have been the carrying value of the asset or liability in the accounts of the transferor company if a period of account had ended immediately before the date when the company ceased to be party to the loan relationship.]

[F5(2ZA)Where the debits or credits to be brought into account for the purposes of this Chapter in respect of any amounts fall to be determined in accordance with sub-paragraph (2) above, Schedule 28AA to the Taxes Act 1988 (provision not at arm’s length) does not apply in relation to those amounts.]

[F6(2A)This paragraph does not apply where the transferor company [F7is regarded for the purposes of this sub-paragraph as using] [F8fair value accounting] as respects the loan relationship, but in any such case—

[F9(a)the amount to be brought into account by the transferor company in respect of the transaction, the result of the series of transactions, or the transfer must be—

(i)where an asset is to be brought into account, the fair value of the asset, or of the rights under or interest in the asset, and

(ii)where a liability is to be brought into account, the fair value of the liability,

as at the date on which the transferee company becomes party to the loan relationship[F10; and]

[F11(aa)for any accounting period in which it is a party to the relationship, the transferee company shall be treated for the purpose of determining the credits and debits to be brought into account for the purposes of this Chapter in respect of the relationship as if it had acquired the asset or liability representing the relationship for a consideration equal to the amount mentioned in paragraph (a) above (but on the assumption that sub-paragraph (2C)(b) below is omitted).]]

F12(b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .]

[F13(2B)The transferor company shall be regarded for the purposes of sub-paragraph (2A) above as using fair value accounting as respects the loan relationship only if—

(a)it uses fair value accounting as respects the relationship and the debits and credits to be brought into account for the purposes of this Chapter as respects the relationship are also determined on that basis, or

(b)it does not use fair value accounting as respects the relationship but the debits and credits to be brought into account for the purposes of this Chapter as respects the relationship are determined on that basis.]

[F14(2C)In any case where a discount (within the meaning given by section 100(3A)) arises in respect of the transaction, the series of transactions or the transfer—

(a)the consideration for the purposes of sub-paragraph (2)(a) above is to be increased by the amount of the discount;

(b)the amount to be brought into account by virtue of sub-paragraph (2A)(a)(i) above is to be increased by the amount of the discount.]

(3)This paragraph does not apply by virtue of sub-paragraph (1)(a) or (b) above in relation to any transfer of an asset, or of any rights under or interest in an asset, where the asset was within one of the categories set out in section 440(4)(a) to (e) of the Taxes Act 1988 (assets held for certain categories of [F15long-term] business) either immediately before the transfer or immediately afterwards.

(4)This paragraph does not apply by virtue of sub-paragraph (1)(c) or (d) above in relation to any transfer of an asset, or of any rights under or interest in an asset, where—

(a)the asset was within one of the categories set out in section 440(4) of the Taxes Act 1988 immediately before the transfer; and

(b)is not within that category immediately afterwards.

(5)For the purposes of sub-paragraph (4) above, where one of the companies is an overseas life insurance company an asset shall be taken to be within the same category both immediately before the transfer and immediately afterwards if it—

(a)was within one category immediately before the transfer; and

(b)is within the corresponding category immediately afterwards.

(6)References in this paragraph to one company replacing another as a party to a loan relationship shall include references to a company becoming a party to any loan relationship under which its rights [F16, or (as the case may be) its obligations,] are equivalent to those of the other company under a loan relationship of which that other company has previously ceased to be a party.

(7)For the purposes of sub-paragraph (6) above a person’s rights under a loan relationship are equivalent to rights under another such relationship if they entitle the holder of an asset representing the relationship—

(a)to the same rights against the same persons as to capital, interest and dividends, and

(b)to the same remedies for the enforcement of those rights,

notwithstanding any difference in the total nominal amounts of the assets, in the form in which they are held or in the manner in which they can be transferred.

[F17(7A)For the purposes of sub-paragraph (6) above a person’s obligations under a debtor relationship are equivalent to obligations under another such relationship if they subject the holder of the liability representing the relationship—

(a)to the same obligations to the same persons as to capital, interest and dividends, and

(b)to the same remedies for the enforcement of those obligations,

notwithstanding any difference in the total nominal amounts of the assets representing the corresponding creditor relationships, in the form in which those assets are held or in the manner in which they can be transferred.]

[F18(8)In this paragraph references to a company which is a member of a group of companies shall be construed in accordance with section 170 of the Taxation of Chargeable Gains Act 1992.]

[F19(9)In this paragraph—

• [F20“carrying value” has the same meaning as it has for the purposes of paragraph 19A below;]

• “contracts of long-term insurance” means contracts which fall within Part II of Schedule 1 to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001;

• “insurance business transfer scheme” means a scheme falling within section 105 of the Financial Services and Markets Act 2000, including an excluded scheme falling within Case 2, 3 or 4 of subsection (3) of that section;

• “overseas life insurance company” has the same meaning as in Chapter 1 of Part 12 of the Taxes Act 1988.]