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HMRC internal manual

Savings and Investment Manual

Interest: specific inclusions: discounts: case law

Case law on discounts and premiums

SAIM2220 explains that discounts and premiums may represent alternative forms of reward for the use of money, instead of the more usual interest.

Where the lending carries a reasonable commercial rate of interest and is either issued at a discount or repayable at a premium, it may normally be assumed that the discount or premium is not in the nature of income. The discount or premium may reflect factors other than the time value of money, such as market risk.

However, where there is no interest, or the rate of interest is below a commercial rate,

  • a discount should be treated as falling within ITTOIA05/S381,
  • a premium should be treated as being interest, chargeable under ITTOIA05/S369 (1).

The leading case in this area is Lomax v Peter Dixon & Son Ltd (25TC353). CIR v Thomas Nelson & Sons Ltd (22TC175), and Davies v Premier Investment Co Ltd and Hewetson v Carlyle (27TC27) are also relevant.

In practice it will usually be unnecessary to refer to, or apply, these principles since most securities issued at discount or repayable at a premium will rank as deeply discounted securities, for which a specific tax treatment is prescribed - see SAIM3000.