Income Tax (Trading and Other Income) Act 2005 section 431

Excluded occasions of redemption

Section 431 sets out the circumstances in which certain occasions of redemption (other than maturity) are excluded from the deeply discounted security test, so that the security is not treated as deeply discounted merely because of those redemption possibilities.

• Certain early redemption occasions are ignored when applying the deep discount test if either the "third-party option conditions" or the "commercial protection conditions" are satisfied.
• The third-party option conditions require that redemption is at the option of someone other than the holder, the security was issued to a person unconnected with the issuer, and obtaining a tax advantage is not a main benefit of the redemption provision.
• The commercial protection conditions require that redemption can only occur on an adverse event affecting the holder or a default, and at the time of issue it appeared unlikely the option would be exercisable.
• If a security escapes deep discount status solely because of the third-party option exclusion but later passes into the hands of a person connected with the issuer, it is treated as a deeply discounted security from that point; conversely, if an unconnected person acquires a security that was treated as deeply discounted only because of a connected-person issue, it ceases to be deeply discounted on acquisition.