In Philip Savva and others v HMRC [2015] UKUT 141 (25 March 2015), the UT found that a scheme involving discounts on stripped interest coupons did not work.
The joint cases involved a scheme, sold by a bank, which was designed to provide a higher return on cash than could have been obtained by placing it on a conventional short-term deposit. The bank stripped interest coupons for the requisite period from a high grade fixed or floating rate bond. The bank then sold the relevant bond to the taxpayer at a discounted price. Finally, the taxpayer held the bond until the end of the stripped period and sold it on the market for its full undiscounted value.
The scheme relied on the facts that no profit of an income nature was receivable on the bonds (as no interest was payable) and that the gain realised on the sale of the bond was exempt from CGT as the disposal of a qualifying corporate bond (QCB).
Agreeing with the FTT, the UT found that Mr Savva’s profit was a discount of an income nature under ITTOIA 2005 s 381. The only function of the discount was to compensate him for the interest coupons which had been stripped from the notes before they were sold to him. The UT found, however, that Mr Savva had not received a separate security. The underlying securities remained unchanged, although the beneficial ownership of the rights attached to them had been split between the bank (which was entitled to interest) and Mr Savva (who held the right to capital on maturity). Mr Savva was therefore not chargeable to income tax under ITTOIA 2005 Chapter 8 (deeply discounted securities).
Why it matters: In deciding whether the taxpayer’s return was of an income nature, the UT focused on the purpose of the discount, which was to compensate for the loss of interest. The fact that the entire transaction had been entered into to obtain a higher return on deposits was not directly relevant. The UT also dismissed the taxpayer’s appeal in Malcolm Healey v HMRC [2015] UKUT 140, which turned on similar facts.
In Philip Savva and others v HMRC [2015] UKUT 141 (25 March 2015), the UT found that a scheme involving discounts on stripped interest coupons did not work.
The joint cases involved a scheme, sold by a bank, which was designed to provide a higher return on cash than could have been obtained by placing it on a conventional short-term deposit. The bank stripped interest coupons for the requisite period from a high grade fixed or floating rate bond. The bank then sold the relevant bond to the taxpayer at a discounted price. Finally, the taxpayer held the bond until the end of the stripped period and sold it on the market for its full undiscounted value.
The scheme relied on the facts that no profit of an income nature was receivable on the bonds (as no interest was payable) and that the gain realised on the sale of the bond was exempt from CGT as the disposal of a qualifying corporate bond (QCB).
Agreeing with the FTT, the UT found that Mr Savva’s profit was a discount of an income nature under ITTOIA 2005 s 381. The only function of the discount was to compensate him for the interest coupons which had been stripped from the notes before they were sold to him. The UT found, however, that Mr Savva had not received a separate security. The underlying securities remained unchanged, although the beneficial ownership of the rights attached to them had been split between the bank (which was entitled to interest) and Mr Savva (who held the right to capital on maturity). Mr Savva was therefore not chargeable to income tax under ITTOIA 2005 Chapter 8 (deeply discounted securities).
Why it matters: In deciding whether the taxpayer’s return was of an income nature, the UT focused on the purpose of the discount, which was to compensate for the loss of interest. The fact that the entire transaction had been entered into to obtain a higher return on deposits was not directly relevant. The UT also dismissed the taxpayer’s appeal in Malcolm Healey v HMRC [2015] UKUT 140, which turned on similar facts.
