Deeply discounted securities: corporate strips
Strips of securities other than those issued by governments
Finance (No.2) Act 2005 extended the rules on deeply discounted securities to apply to strips of bonds issued by other than governments.
Unlike gilt strips, there is no regulated market for strips of other types of interest bearing securities, and previously there were no special tax rules for such strips. The F(No.2)A 05 rules were introduced to deal with avoidance schemes involving these type of strips. The schemes involved taking normal interest bearing securities issued by companies and stripping the rights to some or all of the coupons from the principal repayment. The resultant rights have a value which is less than the amount which will eventually be paid by the issuer in respect of them and thus produce the effect of discount. But the rights were not taxed as deeply discounted securities because the underlying security from which they derived was not issued at a discount. The new rules, which are now set out at ITTOIA05/S452A to S452G, ensure that any profit or redemption of corporate strips is taxed as income when it is realised. The rules apply to corporate strips acquired on or after 2 December 2004, unless acquired under an agreement entered into before that date.
SAIM3160 explains the tax rules on corporate strips.