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CTM15501 – Distributions: general: interest or other value in respect of securities – principal secured – HMRC internal manual

FHDDS51830 - Penalties, sanctions and offences: penalties – policy: special reductions - When special circumstances do not exist - HMRC internal manual

CTA10/S1006, CTA10/S1007, CTA10/S1008, CTA10/S1018, CTA10/S1117(6)

When considering whether CTA10/S1000 (1) E or F applies, the amount of the principal secured must first be determined.

The phrase ‘principal secured’ is not defined in the tax statute but takes its general meaning of the minimum amount the holder of the security is entitled to receive on maturity of the security under the terms of issue. The amount may be adjusted by specific legislation.

Securities issued at a discount: restriction of amount of principal secured

A security may be issued at a discount to the repayable amount. Such a discount provides the borrower with flexibility in deciding the return on the security as a combination of periodic interest and redemption sum.

There are two sets of provisions relevant to securities issued at a discount which operate independently to restrict the amount of the principal secured.

  • CTA10/S1006 and CTA10/S1018 (1) restrict the principal secured for securities issued at a discount to the new consideration received by the company for issuing the securities: CTA10/S1006 applies for the purpose of CTA10/S1000(1) E and CTA10 /S1018 (1) applies for the purposes of CTA10/S1000 (1) F. The principal is not, therefore, increased to the amount payable on maturity of security. This applies without prejudice to CTA10/S1117 (6).
  • CTA10/S1117 (6) applies to securities that are not listed on a recognized stock exchange. The principal secured cannot exceed the issue price of the security except where the security is issued on terms reasonably comparable with the terms of issue of listed securities.

The issue price of a security may differ from the new consideration received by the issuer. Examples might be where a security is offered at a particular discount, but there are movements in the market rate of interest between the date of offer and issue, where an investment bank takes its charges or where the subscriber provides non-cash consideration for the issue that is found to differ from the issue price.

The following example clarifies the interaction of the provisions of CTA10/S1006, CTA10/S1018 (1) and CTA10/S1117 (6):

  • A security with a face value of £100 is issued at a discounted issue price of £97 but, for one of the above reasons, the lender provides £98. The sum of £98 is the amount of the new consideration received by the company.
  • CTA10/S1006 and CTA10/S1018 (1) restrict the principal secured to £98 but CTA10/S1117 (6) then further restricts the amount to £97, except in the case of listed securities or securities which are comparable to listed securities.

The above restrictions provide an upper limit for the secured principal but do not impose a lower limit. If a security is issued for new consideration of £100 but the principal secured is £20, neither CTA10/S1006 and CTA10/S1018 (1) nor CTA10/S1117 (6) will adjust the principal secured to the amount paid. CTA10/S1008 will apply to achieve this result if all the relevant conditions are met.

Securities issued at a premium

A premium is an amount paid under a contract above a specified issue or nominal price. The principal secured includes any premium that must be paid under the terms of the security upon redemption or conversion of the security.

Where a security is issued at a premium representing new consideration, the principal secured by the security is the sum of the principal and the premium. See CTA10/S1007 for non-commercial securities within CTA10/S1000 (1) E and by CTA10/S1018 (2) (3) for special securities within S1000 (1) F.

But see below where the consideration exceeds the principal secured for non-commercial securities.

Consideration for issue exceeds the principal secured: non-commercial securities

CTA10/S1008 provides that where the amount of the new consideration received for the issue of a security is more than the principal secured, (ie the amount payable on maturity), the amount of the principal secured is increased to the amount of the new consideration for the purposes only of securities within CTA10/S1000 (1) E. This is subject to the exceptions at CTA10/S1009 to CTA10/S1012, see CTM15503. CTA10/S1007 (securities issued at a premium) will not apply.

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