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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Deemed loan relationships: alternative finance: investment bond arrangements: conditions: discounts

Amounts equivalent to discount

Like conventional bonds, alternative finance investment bonds may be issued at a discount to their face value or repaid at a premium. The difference between the capital subscribed and the amount repaid is treated by the legislation as an ‘additional payment’.

Suppose, for example, that an alternative finance investment bond has a face value of £100 but is issued for £90. The £100 received by the holder on maturity consists, in statutory terms, of a ‘redemption payment’ of £90 and an ‘additional payment’ of £10. The redemption payment cannot exceed the capital originally subscribed for the bond.

Since CTA09/S509 (CFM44040) treats alternative finance investment bonds as loan relationships for CT purposes, any profit realised by a company on disposal will simply give rise to a loan relationships credit in the normal way.

For income tax purposes, however, it is necessary to distinguish between amounts equivalent to discount and the generality of ‘additional payments’. This is because

  • ITA07/S564O (CFM44310) applies statutory provisions relevant to interest - in particular, rules requiring income tax to be deducted at source in particular circumstances - to alternative finance return, but it would be inappropriate to apply these rules to discount; and
  • it is desirable that the rules in ITTOIA05/PT4/CH8, imposing an income tax charge on profits from deeply discounted securities, should apply to sukuk as they apply to conventional securities.

ITA07/S564L and S564R addresses both of these points. It provides that, where additional payments in respect of alternative finance investment bonds equate to discount, they are not treated as alternative finance return for income tax purposes. This means that income tax rules specific to interest, including provisions requiring tax deduction at source, will not apply to them.

An income tax payer receiving such ‘discount element’ will be taxed on it under the deeply discounted security rules where they apply (see SAIM3000). Where they do not, the return will be taxed as interest under ITTOIA05/S381.