Income Tax (Trading and Other Income) Act 2005 Explanatory Notes

Section 430: Meaning of “deeply discounted security”

1738.This section provides a general definition of “deeply discounted security” for the purposes of Chapter 8. It is based on paragraph 3 of Schedule 13 to FA 1996.

1739.The main test to identify relevant discounted securities is spread over paragraph 3(1), (3) and (4) of Schedule 13 to FA 1996. The test compares the amount payable on redemption with the issue price of the security to see whether, under its terms of issue, it is capable of yielding a “deep discount” on redemption.

1740.A security is capable of yielding a “deep discount” if the amount payable on redemption could exceed the issue price by more than a specified percentage of the amount payable on redemption. In the rare case where the security has an expected life of 30 years or more, the percentage specified is 15%. In all other cases the percentage specified is equal to half the number of years between the date of issue and the date of redemption.

1741.This means that a deep discount occurs where the amount payable on redemption could exceed the issue price and the potential difference amounts to more than 0.5% of the amount payable on redemption for each year of the security’s life. For example, a five year bond issued for £90 and redeemable for £100 is a deeply discounted security because the discount is more than the specified 2.5% (that is, 0.5% for each year of the bond’s life). This is expressed in subsection (1) by means of a formula.

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