Schedule 13

Finance Bill – in a Public Bill Committee at 11:00 am on 9th June 2009.

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Chargeable gains in stock lending: insolvency etc of borrower

Photo of Jimmy Hood Jimmy Hood Labour, Lanark and Hamilton East

With this it will be convenient to discuss Government amendment 91.

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform, Economic Secretary (Economic and Business), HM Treasury

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 borrower’s 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 company’s 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 legislation’s intended effect; they merely correct a drafting error.

Amendment 90 agreed to.

Amendment made: 91, in schedule 13, page 131, leave out lines 30 to 34 and insert—

‘The liability mentioned in subsection (7)’.—(Ian Pearson.)

Schedule 13, as amended, agreed to.