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HMRC internal manual

Savings and Investment Manual

Interest: sale of interest rights: disposal of deposit rights

The taxation of certificates of deposit

ITTOIA05/S551 to S554 charge profits from the disposal of ‘deposit rights’ to tax. Until 2003, ‘deposit rights’ generally took the form of a ‘certificate of deposit’ (CD).

A CD is a certificate, issued by a bank to a depositor. The certificate contains a promise to pay a certain amount, with or without interest, to whoever holds the certificate. In the UK CDs are issued subject to standard terms and conditions, are governed by the Financial Services and Markets Act 2000, and may be traded. A CD usually pays interest at a higher rate than savings accounts because banking institutions require a commitment to leave money in the CD for a fixed period of time. Often there is a financial penalty (fee) for cashing in a CD before the pledged time runs out.

Under a paperless version of the arrangement, a certificate was only issued if the holder called for one.

Legislation on certificates of deposit (CDs) was introduced in 1973, and was previously in ICTA88/S56. The legislation was extended to paperless CDs in 1992 by the insertion of ICT88/S56A. The aim was to stop tax avoidance where CDs were sold at a profit just before maturity. The increase in value was not taxable as interest, and because CDs do not constitute a debt on a security, the seller also escaped capital gains tax. The legislation stopped the avoidance by providing that, where the right to receive the amount stated in a CD was disposed of, the gain was taxable under Case VI of Schedule D. ICTA88/S56 and S56A continue to apply for Corporation Tax purposes.

Administration of the UK market in CDs and other forms of money market instrument, has become increasingly centralised and computerised. In 2001 the Treasury made regulations to facilitate the computerisation of the market (the Uncertificated Securities Regulations 2001 SI 2001/3755). The regulations introduced the concept of ‘units of a security to be evidenced otherwise than by a certificate and transferred otherwise than by a written instrument’. These regulations were modified in 2003 by the Uncertificated Securities (Amendment) (Eligible Debt Securities) Regulations 2003 SI 2003/1633 which introduced the term ‘eligible debt securities’.

In September 2003, existing money market instruments, including certificates of deposit, migrated to a new, wholly computerised and uncertificated system. Paper certificates of deposit (and paper versions of other types of money market instrument) may still be issued. But conventionally it is now units of an “eligible debt security” that are issued. The vast majority of deposit rights in 2005-06 and later years will take the form of units of ‘uncertificated eligible debt securities’, although there are likely to be a few extant old certificates of deposit (or the previous paperless equivalent) and a few new certificated deposits. The charge in Chapter 11 of Part 4 of ITTOIA05 applies to all such types of deposit, old and new. SAIM2520 explains the legislation.

Where there is a disposal of a certificate of deposit or eligible debt security denominated in a foreign currency, the profit is the difference between the sterling equivalent spot rates at the dates of the acquisition and disposal.