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HMRC internal manual

Corporate Finance Manual

Loan relationships: special types of security: deeply discounted securities: connected companies and close companies: what are deeply discounted securities?

DDS: definition

Securities may be

  • issued at a discount to the face value, or
  • redeemed at a premium to the face value.

Broadly speaking, a security will be a deeply discounted security if the difference between the issue price, or the price paid on issue, and the redemption amount exceeds or might exceed

  • 0.5% of the redemption price for each year of the term of the debt where the term is less than 30 years, or
  • 15% of the redemption price where the loan period is 30 years or more.

The term ‘deeply discounted security’ has the same meaning as it has for income tax purposes, in ITTOIA05/PT4/CH8. Some securities are excluded from being a deeply discounted security. These are asset-linked securities, where the return is linked to the value of chargeable assets. See the Savings and Investment Manual (SAIM3000) for more details.

Example 1

LY Ltd issues loan notes with a face value of £12,000. The issue price is £10,000 and the notes will redeem in 5 years’ time.

The difference between the issue price and the redemption amount is £2,000.

This is more than the calculated amount, £12,000 (redemption amount) x (0.5 x 5)% = £300 and so the security is a deeply discounted security.

Example 2

BG Ltd issues securities for £100,000 that are redeemable in 35 years’ time for

  • the subscription amount, increased by
  • the percentage movement in the Retail Price Index over the same period.

This link to the RPI may give an increase in value over that period of more than 15% of the redemption price. Even if this turns out not to be the case, the securities are still deeply discounted.