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HMRC internal manual

Savings and Investment Manual

Disguised interest: the charge to tax

The full amount of the income arising (section 381B)

Income tax is charged on the full amount of the return, or any part of the return that arises in the tax year. The term thus replicates the charge to tax on interest under ITTOIA05/PT4/CH2.

The ‘full amount’, as with interest, means the gross amount of the return, without deductions.

‘Arising’ here takes its meaning from the case law on interest ‘arising’ as explained in SAIM2400 and SAIM2440. It includes any case where a person can access the return, for example as a consequence of exercising an option, disposing of a security, or by carrying out similar transactions.

Any part of the return

The charge on the amount arising in the tax year includes any part of the return that arises in the tax year. Where, for example, the arrangement is not undertaken or completed as originally envisaged (perhaps because an instrument is disposed of), and only part of the return from the arrangement materialises, the amount taxable as having arisen is the disguised interest that has accrued at that point - that is, that part of the return actually produced.


Ms A pays 85 to enter into a disguised interest arrangement which will produce 100 at the end of a two year period. This is approximately equal to a compounded annual 8% return. She sells her rights under the arrangement three months before the end of the second year for 98. The disguised interest return arising is 13, the difference between the amount paid to enter into the arrangement and the amount realised from disposing of her rights under the arrangement.

The person liable (section 381C)

The person taxable is the person receiving or entitled to the return, or any part of the return. The provisions for disguised interest are, therefore, consistent with the provisions applying to a person who receives or is entitled to interest under ITTOIA05/PT4/CH2. See SAIM2400.