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HMRC internal manual

Savings and Investment Manual

Deeply discounted securities: occasions when redemption is ignored

Excluded occasions of redemption

ITTOIA05/S431 provides two occasions on which securities that are redeemed early (that is, other than at maturity) are ignored for the purposes of the deeply discounted securities scheme. These are when

  • the ‘third party option conditions’, or
  • the ‘commercial protection conditions’

are met.

The ‘third party option conditions’

This exclusion applies where the security is redeemed at the option of a person other than the holder, provided the holder is not connected (within the meaning of ICTA88/S839) with the issuer, and provided the early redemption does not result in any person obtaining a tax advantage. Tax advantage takes its meaning from CTA10/S1139 - see ITTOIA05/S460 (2).

Although the legislation refers to these as the ‘third party option conditions’, the exclusion applies to securities where the issuer has the right to redeem the security early or on any occasion where early redemption is mandatory provided that the conditions are met.

A security which was not a DDS because the holder was not connected with the issuer becomes one for the purposes of this exclusion where it is acquired by a person connected with the issuer. Where a security is only a DDS by virtue of the connected persons rule, it ceases to be so if transferred to an unconnected person.

The ‘commercial protection conditions’

This exclusion applies when the redemption is a result of the exercise of an option that may only be exercised on an ‘event adversely affecting the holder’, or on the default of any person, and where, judging at the time of issue, neither is likely to occur.