CTM15501 - Distributions: general: interest or other value in respect of securities - principal secured
ICTA88/S209(3), (3A), (3AA) & ICTA88/S254 (11)
When considering whether ICTA88/S209 (2)(d), (da) or (e) apply, you must first determine the amount of the principal secured.
The phrase ‘principal thereby secured’ is not defined in tax statute but takes its general meaning of the minimum amount the holder of the security is entitled to receive on maturity of the security under the terms of issue. The amount may be adjusted by specific legislation.
Restriction of amount of principal secured: securities issued at a discount
A security may be issued at a discount to the amount repayable. Such a discount provides the borrower with flexibility in deciding the return on the security as a combination of periodic interest and redemption sum.
There are two provisions relevant to securities issued at a discount which operate independently to restrict the amount of the principal secured.
- ICTA88/S209(3) restricts the principal secured for securities issued at a discount to the new consideration received by the company for issuing the securities. The principal is not, therefore, increased to the amount payable on maturity of security. This applies to securities issued after 5 April 1972 and is without prejudice to ICTA88/S254 (11).
- ICTA88/S254 (11) applies to securities that are not listed on a recognised stock exchange. The principal secured cannot exceed the issue price of the security except where the security is issued on terms reasonably comparable with the terms of issue of listed securities.
The issue price of a security may differ from the new consideration received by the issuer. Examples might be where a security is offered at a particular discount, but there are movements in the market rate of interest between the date of offer and issue, where an investment bank takes its charges or where the subscriber provides non-cash consideration for the issue that is found to differ from the issue price.
The following example clarifies the interaction of the provisions of ICTA88/S209 (3) and ICTA88/S254 (11).
- A security with a face value of £100 is issued at a discounted issue price of £97 but, for one of the above reasons, the lender provides £98. The sum of £98 is the amount of the new consideration received by the company.
- ICTA88/S209 (3) restricts the principal secured to £98 but ICTA88/S254 (11) then further restricts the amount to £97, except in the case of listed securities or securities which are comparable to listed securities.
It should be noted that the above restrictions provide an upper limit for the principal secured but do not impose a lower limit. If a security is issued for new consideration of £100 but the principal secured is £20, neither ICTA88/S209 (3) nor ICTA88/S254 (11) will adjust the principal secured to the amount paid. ICTA88S209 (3AA) will apply to achieve this result if all the relevant conditions are met.
Restriction of amount of principal secured: securities issued at a premium
A premium is an amount paid under a contract above a specified issue or nominal price. The principal secured includes any premium that must be paid under the terms of the security on redemption or conversion of the security.
Before 1 April 1996 the principal secured did not include any premium charged on issue unless that amount was reflected in the amount the borrower had to pay on redemption or conversion of the security.
For distributions made on or after 1 April 1996, ICTA88/S209 (3A) provides that where a security is issued at a premium representing new consideration:
- the principal secured by the security the purposes of ICTA88/S209 (2)(d), (da) and (e) is the sum of the principal and the premium.
The provisions of ICTA88/S209 (3AA) together with ICTA88/S209A and ICTA88/S209B will apply mainly to securities issued by banks and securities houses for payments of interest or other distributions made on or after 17 April 2002. ICTA88/S209 (3AA) provides that where a security is issued at a premium representing new consideration:
- the principal secured by the security the purposes of ICTA88/S209 (2)(d) only is the sum of the principal and the premium.
ICTA88/S209(3A) will not apply for the purposes of ICTA88/S209 (2)(d), but the conditions of ICTA88/S209A and ICTA88/S209B apply - see CTM15503).
Inspectors should consult CTIAA (Technical) before making enquiries under the legislation applying prior to the introduction of ICTA88/S209 (3A) for distributions made after 31 March 1996 and ICTA88/S209 (3AA) for payments of interest or other distributions made on or after 17 April 2002.