SAIM3040 - Deeply discounted securities: securities which are not deeply discounted securities

Some securities are not deeply discounted securities

ITTOIA05/S432 excludes certain types of security from being deeply discounted securities. These are

• company shares
• gilt-edged securities which have not been stripped (see SAIM3130 for more on strips)
• life assurance policies
• capital redemption policies.

In practice, therefore, most deeply discounted securities will be securities in the nature of debts, that is, where the issuer has an obligation to make some form of return to the investor.

Excluded indexed securities

‘Excluded indexed securities’ are only deeply discounted securities where the parties are connected. See SAIM3050.

Securities issued in separate tranches

Subject to certain limits, securities issued under the same prospectus in separate tranches may be excluded from being treated as deeply discounted securities. See SAIM3060.

Securitised derivatives

Securitised derivatives present particular problems. These are investment products where the amount which the investor gets back at the end depends on the performance of a share index, or a particular share or shares, or (less commonly) some other asset. The capital initially subscribed by the investor may be completely or partly protected, or it may be possible for the investors to lose the whole of their money.

Some such products, properly analysed, are options, for which the investor pays a premium (these are often described as ‘warrants’). Others may be contracts for differences, or other derivatives. These will not be deeply discounted securities; disposal of an option, or of a financial future within TCGA92/S143, will give rise to a capital gain or allowable loss. See also SAIM7000 on the tax treatment of derivatives that generate an interest-like return.

Other securitised derivatives, however, create a debt (in technical terms, they are structured as a debt security plus one or more options or other derivatives). These will be deeply discounted securities, unless they fulfil the stringent conditions to be ‘excluded indexed securities’ ( SAIM3050). You should seek advice from CT & VAT (Financial and Insurance Team) if it is unclear whether or not a particular instrument is a deeply discounted security.