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...

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 the discount:

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