Deeply discounted securities

Produced by Tolley

The following Personal Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Deeply discounted securities
  • What is a deeply discounted security?
  • Security strips
  • What is a taxable disposal for DDS?
  • Calculating the profit chargeable to income tax
  • Tax assessment
  • Can an allowable loss arise on the disposal of a DDS?
  • Reporting
  • UK securities
  • Overseas securities
    • More...

Deeply discounted securities

A security is issued at a discount if the amount payable on redemption exceeds the issue price. The profits on disposal of deeply discounted securities (DDS) are chargeable to income tax rather than capital gains tax. An income tax profit arises where the discount exceeds a specified proportion of the amount payable on redemption. Losses are not usually allowable.

The profit is classed as savings income for the income tax calculation, and so the savings income tax rates apply, including the starting rate for savings and the savings nil rate band. See the Taxation of savings income guidance note for details.

The current rules on DDS apply for transactions after 5 April 2005 and are explained in this guidance note. The provisions that applied for transactions before that time were substantially the same; however, the securities were previously known as relevant discounted securities. See SAIM3010.

If the taxpayer holds DDS, it is likely that he does so within his investment portfolio run by a stockbroker. If this is the case, the broker should clearly identify the DDS within the portfolio and provide details of any profit made on these securities in the year-end tax pack.

What is a deeply discounted security?

A UK or overseas security is deeply discounted if, at the time it is issued, the amount payable on redemption (or maturity) exceeds or may exceed the amount paid for the security (also known as the issue price) by more than:

A x 0.5% x Y

Where:
A is the amount received on redemption (any interest payable is ignored for the purposes of this calculation)
Y is the number of years in the redemption period or 30, whichever is the lower (each month or part month counted as one-twelfth)
ITTOIA 2005, s 430

If the securities have an original issue maturity of less than one year, the 0.5% per annum figure is reduced on a pro rata basis.

See Example 1.

The following cannot be DDS, no matter

There’s no margin for error.
Think Tax.
Think Tolley.
TolleyGuidance gives you direct access to critical, comprehensive and up-to-date tax information and expertise you can rely on.
Take a free trial
Popular documents
LEXISNEXIS

What is a loan relationship?

Almost all companies will have some loan relationships. However, some items that are commonly assumed to be loan relationships are not (eg outstanding consideration for the sale / purchase of property and inter-company balances relating to unpaid amounts for goods or services, in each case where

LEXISNEXIS

Corporate interest restriction ― calculating tax-interest expense amounts and tax-EBITDA

Why do we need to calculate these amounts?This guidance note sets out details of the initial calculations a group will need to undertake for the purposes of the corporate interest restriction (CIR) regime. For a general overview of the regime, see the Corporate interest restriction ― overview

LEXISNEXIS

Share for share exchange

This guidance note considers the capital gains tax implications where shares are sold in exchange for new shares.The consideration paid by a purchasing company to the shareholder(s) for their shares in a target company could be in the form of either:•new shares in the purchasing company in exchange

LEXISNEXIS

Change in ownership provisions

Restriction of carry forward and carry back of trading lossesFollowing the extensive changes to the loss carry forward provisions introduced from 1 April 2017, the anti-avoidance rules restricting the offset of trading losses following a change in ownership were tightened up and extended.