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HMRC internal manual

Savings and Investment Manual

Deeply discounted securities: taxation: profit on disposal

The charge to income tax

The charge to income tax under ITTOIA05/S428 is on profits arising on disposals in the tax year. Profits on disposals of securities outside the UK are taxed as ‘relevant foreign income’ and the special rules in Part 8 of ITTOIA05 apply. See also SAIM3120 on the application of Chapter 2 of Part 13 of ITA07 on the transfers of assets abroad.

Meaning of ‘disposal’

The person treated as making the disposal is the person entitled as holder to any payment on disposal. Disposal is defined in ITTOIA05/S437. It includes redemption, transfer by sale, exchange or gift, and conversion into shares.

See SAIM3110 for transfer to personal representatives.

See SAIM3130 for rules on disposal of gilt strips and SAIM3150 on corporate strips.

ITTOIA05/S438 provides that transfer occurs when the holder becomes entitled to the security or, if the agreement is conditional, when the conditions are fulfilled.

Computation of profits

ITTOIA05/S439 contains the basic computational provision. A profit on disposal arises where the amount received exceeds the amount paid. No account is taken of any incidental costs of acquisition or disposal, except where the disposal is of listed securities and the incidental costs were incurred before 27 March 2003.

See SAIM3080 for rules on losses.

See SAIM3090 for the application of market value rules in computing profits.

See SAIM3100 for the application of ‘earn-out’ rules in computing profits from earn-out rights.

Securities denominated in a foreign currency

Exchange gains and losses are included in the computation of the full amount of profits on deeply discounted securities arising in a tax year.

Where a security is denominated in a foreign currency the profit is the difference between the sterling equivalents of the acquisition and disposal amounts, using the spot rates at the material dates.

Deduction of tax

Discounts or premiums payable on the redemption of relevant discounted securities are not payments of interest. Consequently the payments are made without deduction of tax.