In Malcolm Healey v HMRC [2015] UKUT 140 (25 March 2015), the UT found that a discount on a stripped coupon security was of an income nature.
Mr Healey had purchased commercial securities issued by a bank and from which the interest coupons had been stripped. The price paid by Mr Healey was lower, to reflect the low return on the coupons. The interest coupons were later reattached to the notes, which Mr Healey then sold on the market for their full market price. This provided him with an after-tax return much higher than on a fixed-term deposit.
It was accepted that Mr Healey had acquired the notes at a discount ‘in the normal commercial sense of the term’. The issue was whether the discount was of an income nature (chargeable under ICTA 1988 Sch D Case III). The UT found that the discount was clearly not intended to compensate Mr Healey for any capital risk, as the issuer had a high credit rating. Clearly, the purpose of the discount was to compensate Mr Healey for the absence of interest. The position was essentially the same as it would have been if Mr Healey had bought a non-interest bearing note issued at a discount. From Mr Healey’s perspective, it was immaterial that interest was payable to a third party.
The UT stressed, however, that the fact that the transaction was marketed as a way of providing an enhanced after-tax return was not relevant when ascertaining the tax position.
Why it matters: The UT focused on the acquisition of the notes at a discount, rather than on their disposal at a profit. The discount was of an income nature as it compensated for the absence of interest. The UT also dismissed the taxpayer’s appeal in Savva and others v HMRC [2015] UKUT 141 (reported last week), which turned on similar facts. The scheme would not have achieved its intended result today, as income tax returns which are economically equivalent to interest are charged under FA 2013 s 12.
In Malcolm Healey v HMRC [2015] UKUT 140 (25 March 2015), the UT found that a discount on a stripped coupon security was of an income nature.
Mr Healey had purchased commercial securities issued by a bank and from which the interest coupons had been stripped. The price paid by Mr Healey was lower, to reflect the low return on the coupons. The interest coupons were later reattached to the notes, which Mr Healey then sold on the market for their full market price. This provided him with an after-tax return much higher than on a fixed-term deposit.
It was accepted that Mr Healey had acquired the notes at a discount ‘in the normal commercial sense of the term’. The issue was whether the discount was of an income nature (chargeable under ICTA 1988 Sch D Case III). The UT found that the discount was clearly not intended to compensate Mr Healey for any capital risk, as the issuer had a high credit rating. Clearly, the purpose of the discount was to compensate Mr Healey for the absence of interest. The position was essentially the same as it would have been if Mr Healey had bought a non-interest bearing note issued at a discount. From Mr Healey’s perspective, it was immaterial that interest was payable to a third party.
The UT stressed, however, that the fact that the transaction was marketed as a way of providing an enhanced after-tax return was not relevant when ascertaining the tax position.
Why it matters: The UT focused on the acquisition of the notes at a discount, rather than on their disposal at a profit. The discount was of an income nature as it compensated for the absence of interest. The UT also dismissed the taxpayer’s appeal in Savva and others v HMRC [2015] UKUT 141 (reported last week), which turned on similar facts. The scheme would not have achieved its intended result today, as income tax returns which are economically equivalent to interest are charged under FA 2013 s 12.
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