I beg to move amendment 90, in schedule 13, page 131, line 28, after treated insert under subsection (5).
The new rules in schedule 13 provide that, to the extent that collateral is inadequate to replace all the lent securities lost in the event of a borrowers insolvency, the lender is treated as making a disposal but receiving no consideration so that, effectively, a capital loss arises. The borrower then has a debt to the lender for the remaining value of the securities at the time of the insolvency, but because of that insolvency the debt is likely to be bad. In certain circumstances, it is possible that, in addition to the capital loss provided for by the schedule, a life insurance companys profits might be reduced by the amount of that bad debt, which results from the interaction of special rules for computing the profits of life insurance companies and the rules relating to the debts of companies, which are known as the loan relationships rules. The schedule contains a provision that intends to stop a debt being classed as a loan relationship if it results from the insolvency of a stock borrower and an inadequacy of collateral to fully replace stock. The effect is to prevent an unintentional double allowance for life insurance companies as a capital loss and as a bad debt.
The provision in the Bill as drafted contains an error. The drafting provides a formula for arriving at the amount of the debt that is not to be treated as a loan relationship, but unfortunately the formula does not produce the correct result. The cross-references to the rest of the provision do not work as they should. Government amendments 90 and 91 correct that error. Government amendment 90 adds a cross-reference to clarify the effect of another part of the change made to the capital gains rules. Government amendment 91 replaces the incorrect formula for arriving at the debt in question with a reference to a description of that debt elsewhere in the new legislation. The amendments do not change the legislations intended effect; they merely correct a drafting error.