Annex 1: Minor changes in the law made by the Act: Change 86: Deeply discounted securities: deemed acquisitions at market value where deemed disposals on conversion of securities or transfer by personal representatives to legatees: section 441
This change provides that in the case of two sorts of disposals that are treated as made for amounts equal to market value, conversions of relevant discounted securities into other such securities and transfers by personal representatives to legatees, the corresponding acquisitions are treated as acquisitions for the same amounts.
Paragraph 1 of Schedule 13 to FA 1996 charges profits realised from the discount on a relevant discounted security and provides that the profit is realised when a person transfers such securities or becomes entitled to a payment on their redemption.
In four cases Schedule 13 to FA 1996 provides for a transfer of a relevant discounted security to be treated as made at market value and for the corresponding acquisition of the security to be treated as made at that value. They are transfers made on the death of a holder, transfers made otherwise than by a bargain at arm’s length, transfers between connected persons and transfers for a consideration which is not wholly in money or money’s worth. (See paragraphs 4(2), 8(2) and 9(2) of that Schedule.)
Paragraph 6(7) of Schedule 13 to FA 1996 also provides that where personal representatives transfer relevant discounted securities to legatees the personal representatives are treated as obtaining an amount equal to the securities’ market value, and under paragraph 5 of Schedule 13 to FA 1996 where such securities are converted into shares or other securities the conversion is to constitute the redemption of the securities and “to involve a payment” on the redemption of an amount equal to the market value of the shares or securities. But no specific provision is made about the price that the legatees are treated as paying for the securities, nor the acquisition cost of any relevant discounted securities obtained as the result of a conversion of such securities. In practice, however, in both these cases the market value of the securities is taken as being an amount paid in respect of the acquisition of the security, and so is taken into account in calculating the profit or loss on a subsequent disposal of the securities.
Section 441 fills these gaps by providing that a person acquiring these securities on any of the transfers that are treated as occurring at market value or on the conversion of such securities into other such securities is treated as doing so by the payment of their market value.
In the case of the acquisition by legatees the only alternative for acquisition cost if the gap is not filled appears to be that the legatees acquire the securities for no cost. In that case the change would always be favourable to the taxpayer. In the case of the acquisition on conversion there are perhaps two possible alternatives if the gap is not filled. These are that the securities are acquired for no cost or acquired for the acquisition cost of the securities which are converted. If the securities are treated as acquired for no cost the effect is favourable to the taxpayer. If the original acquisition cost of the converted securities is used the effect would usually be favourable, but may not be in rare cases.
This change is favourable to most taxpayers in principle but may be adverse in rare cases. But it is expected to have no practical effect as it is in line with current practice.