CFM5703a - Taxing loan relationships: connected persons and discounted securities: deep gain - examples

Deep gain: examples

Example 1

LY Ltd issues loan notes with a face value of £12,000. The issue price is £10,000 and the notes will redeem in 5 years’ time.

The difference between the issue price and the redemption amount is £2,000.

This is more than the calculated amount, £12,000 (redemption amount) x (0.5 x 5)% = £300 and so the security is a deeply discounted security.

Example 2

BG Ltd issues securities for £100,000 that are redeemable in 35 years’ time for

• the subscription amount, increased by
• the percentage movement in the Retail Price Index over the same period.

This link to the RPI may give an increase in value over that period of more than 15% of the redemption price. Even if this turns out not to be the case, the securities are still deeply discounted.