What types of manipulation does section 449 ITTOIA 2005 target?

Section 449 targets three types of manipulation: overpaying on acquisition to inflate costs and reduce future taxable profit, receiving less than market value on transfer to reduce taxable profit, and receiving less than market value on redemption. In each case the distorted amount is replaced with the strip's market value at the relevant time.

How does the market value substitution work under section 449?

Where a tax-motivated scheme distorts amounts, market value replaces the manipulated figure. An artificially high acquisition cost is replaced with market value at acquisition. Artificially low transfer proceeds are replaced with market value at transfer. Artificially low redemption proceeds are replaced with market value on the day before redemption, for calculating profits under section 439(1) and losses under section 446(3).

Are incidental expenses considered when applying section 449?

No. When determining whether amounts paid or received differ from market value under section 449, incidental expenses connected with any disposal or acquisition of the strip are disregarded. This means costs such as broker fees or transaction charges are excluded from the comparison between the actual amount and market value.

Income Tax (Trading and Other Income) Act 2005 section 449

Strips of government securities: manipulation of acquisition, transfer or redemption payments

Section 449 is an anti-avoidance provision that substitutes market value where a scheme or arrangement has artificially distorted the acquisition cost, transfer proceeds or redemption proceeds of a government security strip, and a main benefit of the arrangement is obtaining a tax advantage.

The section applies where a scheme or arrangement causes the amount paid or received for a strip to differ from its market value, and obtaining a tax advantage is a main benefit of the arrangement.
Three types of manipulation are targeted: overpaying on acquisition, receiving less than market value on transfer, or receiving less than market value on redemption.
In each case, the manipulated amount is replaced with the strip's market value at the relevant time for the purposes of calculating profits and losses on deeply discounted securities.
Incidental expenses connected with any disposal or acquisition of a strip are disregarded when applying this section.

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