CTM49370 - Building societies: deduction of income tax: deduction of income tax from interest on marketable securities

A building society is required to deduct Income Tax from the interest paid on certain marketable securities under ITA07/S889.  The requirement applies to any security including a share which is listed, or capable of being listed, on a recognised stock exchange at the time the dividend or interest is payable.

S889 applies to interest on Permanent Interest Bearing Shares (PIBS), a type of hybrid security, see CTM49480, and interest on certain other marketable securities, such as index-linked stocks and negotiable bonds issued by some societies.

Interest on the following securities is not covered by S889 and is instead payable gross:

  • qualifying certificates of deposit - these are certificates of deposit for not less than £50,000 (or the equivalent in foreign currency), issued for a period not exceeding five years, see ITA07/S985,
  • qualifying uncertificated eligible debt security units as defined in ITA07/S986, and
  • quoted Eurobonds satisfying the circumstances specified in ITA07/S987.

The effect of the requirement to deduct Income Tax is that individuals who are not liable to pay tax cannot register to have such interest paid without deduction.

Similarly, it is not possible for

  • individuals who are not ordinarily resident in the UK,
  • charities,
  • exempt friendly societies, or
  • exempt approved retirement benefit and personal pension schemes

to have interest paid gross by providing a declaration of their tax status.

Non-resident investors (including companies) may be entitled to receive interest on PIBS and other marketable securities without deduction of tax, or after deduction at a reduced rate, under the terms of a double taxation agreement.  Claims for exemption or partial relief may be made using form HS304 available online.

There is guidance on PIBS at INTM342140 and Eurobonds at INTM342160.