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HMRC internal manual

Capital Gains Manual

Deep discount securities: CGT adjustment

TCGA92/S118A charge under ICTA88/SCH4/PARA4 will arise when a deep discount security is disposed of or redeemed, including an early redemption. Either event will be a disposal for Capital Gains Tax purposes. TCGA92/S118 adjusts the Capital Gains Tax computation to exclude any amounts of accrued income which have been charged under paragraph 4 Schedule 4. Either the disposal proceeds are reduced by the amount of the accrued income or, if the accrued income is greater than the disposal proceeds, the excess is treated as enhancement expenditure incurred immediately before the disposal. Because this expenditure is deemed to be incurred immediately before the disposal no indexation allowance is due on it.


  • January 1986 a taxpayer subscribes for 1,000 units of XYZ Ltd loan stock at a total price of £800. The loan stock is redeemable on 31 December 1990 for £1,000.
  • December 1988 the taxpayer sells the loan stock for £940 and incurs a ICTA88/SCH4/PARA4 charge of £80.

Capital Gains Tax computation

Disposal proceeds   940
less Deduction under S118(1)(a) 80  
Cost 800 880
Unindexed gain   60
less Indexation 800 x 0.146*   117
Allowable loss   -57

(* January 1986 - December 1988-0.146)