How is the acquisition cost of a strip of a government security calculated under section 445 ITTOIA 2005?

When a government security is exchanged for its constituent strips, the market value of the original security at the time of exchange is apportioned across all strips received. Each strip's acquisition cost is calculated in proportion to its individual market value relative to the combined market value of all strips at that time.

What is the deemed disposal and reacquisition rule for strips on 5 April?

If you hold a strip on 5 April, you are treated as having disposed of it and immediately reacquired it at market value. This brings any increase in value during the year into charge to income tax, preventing deferral of tax liability. The deemed disposal does not apply if an actual disposal occurs on the same day.

How are strips treated when they are consolidated back into a single government security?

When strips are reconstituted into a single government security, each strip is treated as disposed of at its market value at the time of consolidation. This ensures that any accrued profit on each strip is captured for income tax purposes at that point, before the holder receives the consolidated gilt.

Do the strip rules in section 445 override other deeply discounted securities rules?

Yes. The stripping and consolidation rules in section 445 take priority over the general timing provisions governing when transfers and acquisitions are treated as taking place, and over the general market value rules applying to deeply discounted securities. You must apply section 445's specific rules rather than the default rules elsewhere in the legislation.

Income Tax (Trading and Other Income) Act 2005 section 445

Strips of government securities: acquisitions and disposals

Section 445 sets out the rules for computing the acquisition cost, deemed annual disposals, and consolidation treatment of strips of government securities for income tax purposes.

When a government security is stripped, the acquisition cost of each strip is determined by apportioning the market value of the underlying security across all strips received, based on each strip's relative market value at the time of the exchange.
Anyone holding a strip on 5 April in any tax year is treated as having disposed of and immediately reacquired it at market value on that date, ensuring that the annual increase in value is taxed each year rather than deferred until actual disposal.
When strips are consolidated back into a single security, each strip is treated as disposed of at its market value at the time of consolidation.
The stripping and consolidation rules in this section take priority over the general timing rules and market value rules that would otherwise apply to deeply discounted securities.

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