TSEM3225 - Capital items that are income for tax purposes: discounted securities

Deeply discounted securities have a discount or premium payable on redemption of the bond. This is instead of interest payable over the life of the bond. Deeply discounted securities were known as relevant discounted securities prior to the introduction of ITTOIA, which in turn had replaced deep discount bonds and deep gain securities. They include gilt strips. These are covered at TSEM3230.

Trustees are chargeable when they dispose of the security, or when they redeem it. The taxable amount is the difference between what they paid for it, and what they received back. It is regarded as income, and chargeable at the trust rate. Trustees of an unauthorised unit trust are only chargeable to the trust rate on amounts which are not shown as income in the accounts. Where income from deeply discounted securities is shown as income in the accounts of the unauthorised unit trust it is chargeable at basic rate. See SAIM3120

How to recognise a deeply discounted security

The discount or premium must be capable of being more than

  • 15% of the redemption price, or , if smaller
  • 0.5% of the redemption price for each year of the bond’ life. For example, a 10-year bond with a discount of 5% or more would be a discounted bond.

A security with an uncertain yield is normally a relevant discounted security. It could, for example, be linked to the Retail Price Index.

A security linked to the value of assets chargeable under the capital gains rules, is not normally a relevant discounted security. It could, for example, be linked to the FTSE index.

Detailed instructions about the securities are at SAIM3000+ onwards.