SAIM3050 - Deeply discounted securities: excluded indexed securities
‘Excluded indexed securities’ taxed as capital gains
ITTOIA05/S433 explains the meaning of ‘excluded indexed
securities’. These are outside the deeply discounted security
rules, and are instead taxed under the capital gains rules
(CG53446).
An excluded indexed security is one where the amount payable
to discharge the debt (on redemption or otherwise) is calculated by
applying the percentage change over the redemption period in the
value of ‘chargeable assets', or an index of those assets, to
the amount of the original security.
The ‘excluded indexed security’ rules apply only
to the holder of the instrument. See CFM5900 (
SAIM20000) onwards for the Loan
Relationships rules applicable to companies that issue and hold
such securities.
The percentage change
The percentage change is the full percentage change in the value
of the chargeable assets, or of any index of the value of such
assets, over the redemption period. The percentage change is to be
applied to the full issue price – that is without issue costs
having been deducted.
The terms of the security may provide for the investor to
get back a percentage of his or her original stake money, even if
the value of the relevant chargeable assets plummets. This will not
prevent it being an excluded indexed security provided the
specified percentage is not more than 10% of the issue price. It
should be noted this does
not mean investors can invest £100 and get a
minimum of £110 back; it means they can invest £100 and
get not more than £10 back, losing the other £90 of their
original capital. Unless they can lose at least 90% of the amount
invested it is not an excluded indexed security, and will be a
deeply discounted security.
The redemption period
This is the period between the date of issue and the date of redemption. The rules allow slightly different dates to be used where there are difficulties in obtaining valuations on the issue or redemption dates, and for no other reason.
Chargeable assets
Chargeable assets are those where a gain on disposal of the asset by the person in question would be a chargeable gain, assuming that
- the disposal was not in the course of a trade, profession or vocation carried on by that person,
- TCGA92/S100 (exemption for authorised unit trusts etc.) does not apply, and
- chargeable gains that might accrue under TCGA92/S116 (10) (CG53820 onwards) are disregarded.
Where a security is linked to an index of chargeable assets, changes in the components of the index can be ignored so long as the index continues to reflect the population it was set up to mirror. Cases where the condition may not be satisfied, for example, where a new index is used, or the linkage is to shares in only one company, which then changes, should be referred to CT&VAT (Financial and Insurance Team).
Amount payable on redemption
The investor must have an entitlement to the issue price increased by the relevant change in the value of the chargeable assets (or index). Where the redemption value is to be satisfied by receipt of the linked chargeable assets themselves, with the result that the investor obtains more than the percentage change, the conditions would not be met. Nor is the condition satisfied if the return to the investor is geared, for example, if on redemption the investor receives twice the increase in the index (or some other multiple).
Retail price index
The Retail Prices Index (RPI), and any similar index published by or on behalf of any other government, is not treated as an index in the value of chargeable assets. Where the return on debt is linked to such an index, the debt is likely to be a deeply discounted security.
Interest
Interest payable on redemption is ignored in determining the redemption value of the security, and is chargeable to income tax as savings and investment income in the usual way.
