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HMRC internal manual

Savings and Investment Manual

Deeply discounted securities: strips of government securities: losses

Losses on gilt strips will be rare

ITTOIA05/S446 to S449 deals with losses on strips. Because strips are all issued at a discount, their value can be expected to increase over time, not decrease, in normal market conditions. Genuine losses are therefore extremely unlikely, and any claim to losses on strips should be examined critically. Where a loss exceeds £5000, the case should be referred to the Anti-Avoidance Group before any further action is taken.

FA03 generally abolished relief for losses on deeply discounted securities. However relief remained available for losses on strips of government bonds. This led to a number of tax avoidance schemes designed to create wholly artificial losses from transactions in strips. The losses were then claimed against income generally, to reduce the person’s liability. FA04 introduced legislation to counter this abuse, effective from 15 January 2004. It blocks contrived reductions in profit, as well as the creation of losses.

Redemption or disposal before 15 January 2004

A loss is calculated on a similar basis to a profit. No allowance is made for incidental costs of acquisition or disposal, for strips acquired on or after 27 March 2003. The holder’s loss relief is against general income of the same year. It must be claimed within 12 months from the 31January following the tax year in which the loss was made.

Redemption or disposal on or after 15 January 2004

The following rules apply to the redemption or disposal of a strip on or after 15 January 2004.

ITTOIA05/S447 and S448 restrict the profit or loss on strips by reference to the original acquisition cost in cases where this exceeds the amount payable for the security. Acquisition cost here means the original cost ignoring later disposals and acquisitions on 5 April.

Where a person has entered into any ‘scheme or arrangement’ to manipulate any acquisition or disposal value of a strip, and the obtaining of a tax advantage is the main benefit, ITTOIA05/S449 applies. It substitutes market value where the acquisition cost is more than market value or the redemption proceeds are less than market value. ITTOIA05/S460 takes the meaning of tax advantage from ITA07/683 (which in turn derives from ICTA88/S709 (1)).

There is an associated provision in TCGA92/S151C (formerly in FA96/SCH13/PARA14C) which prevents the creation of an allowable capital loss under a ‘scheme or arrangement’ which results in any person obtaining a tax advantage or an allowable loss. This rules applies to losses accruing on or after 17 March 2004.

Meaning of market value

FA04 introduced a new definition of ‘market value’ for gilt strips, and strips of non-UK government securities now in ITTOIA05/S450 and S451. The market value of a strip, or a security exchanged for strips, means its publicly quoted price in the London Stock Exchange Daily Official List. For overseas government securities and strips of such securities that are not quoted in that List, prices quoted in the equivalent foreign stock exchange list of the country of issue are to be used.