What does section 427 of ITTOIA 2005 do?

Section 427 establishes that profits arising on the disposal of deeply discounted securities are subject to income tax. A disposal includes sale, redemption, or deemed disposal. The profit is treated as income, not a capital gain, ensuring it falls within the scope of income tax under United Kingdom law.

Are profits from deeply discounted securities taxed as income or capital gains?

Under section 427 of the Income Tax (Trading and Other Income) Act 2005, profits from deeply discounted securities are classified as income, not capital gains. This ensures such profits are taxed under income tax rules, preventing holders from arguing the profit is a capital receipt outside the scope of income tax.

What is a deeply discounted security for UK tax purposes?

A deeply discounted security is a security issued at a significant discount to its redemption value. The term replaced 'relevant discounted security' from earlier legislation in the 2005 Act. It more accurately describes the nature of the security and distinguishes this regime from the older 'deep gain securities' rules under previous Finance Acts.

How is profit on a deeply discounted security calculated?

The profit is the difference between the disposal proceeds and the acquisition cost. For example, if a security purchased for £7,000 is redeemed at £10,000, the £3,000 profit is treated as income under section 427. This amount must be included in the holder's income tax return for the year of disposal.

Income Tax (Trading and Other Income) Act 2005 section 427

Charge to tax on profits from deeply discounted securities

Section 427 establishes that profits arising on the disposal of deeply discounted securities are subject to income tax.

Income tax is charged on profits made when a deeply discounted security is disposed of or treated as disposed of.
Any such profits are treated as income for income tax purposes, even if they would not otherwise qualify as income.
The term "deeply discounted security" replaces the earlier term "relevant discounted security" used in previous legislation, better reflecting the nature of the security and the tax charge.
This regime is distinct from the earlier "deep gain securities" regime and applies to disposals for whatever reason, including deemed disposals in certain circumstances.

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