Revenue Note for Guidance

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Revenue Note for Guidance

751B Exchange of Irish Government bonds

Summary

The section provides special tax treatment for the Exchange Programme in Irish Government bonds which has been initiated by the National Treasury Management Agency (NTMA). The purpose of the programme is to redeem existing bonds, which may be trading in the market at a substantial premium because of the high interest rate attaching to them, for an amount of equal value of newly issued securities reflecting the current lower rates of interest. This provision defers the capital gains tax liability arising on the exchange of the securities until the earlier of either the sale or redemption of the new securities. The tax will then be due but calculated at the tax rate prevailing at the date of the exchange. It is the tax, not the gain, which is carried forward. Because the exchange may take place part way through an interest payment period, the interest accrued up to that time is chargeable to tax immediately and only the balance of the tax liability is deferred.

The provision has relevance for traders in securities such as banks and general insurance companies as well as life assurance companies and collective funds. Individuals are exempt from capital gains tax on the disposal of Government bonds.

Details

Definitions

(1) “chargeable period” is an accounting period in the case of a company and a year of assessment for any other person.

“the exchange” is the exchange of securities under the Exchange Programme in Irish Government bonds as designated by NTMA.

“investor” is the person exchanging bonds under the exchange programme.

“last payment day” is the last day interest on the bonds was paid subject to the qualification that if the old securities were bought at or soon after issue then strictly speaking there has been no last payment date. The definition deems the date of issue of the securities to be the last payment date in those circumstances.

“new securities” and “old securities” are the securities involved in the exchange.

“securities” is all Government and Semi-State securities as defined in section 36.

Application

(2) Special rules are provided for taxing —

  • financial traders (subsections (3) and (5)), and
  • non-traders including collective funds and the life funds of life assurance companies (subsection (6)).

Tax treatment: financial traders

In the case of financial traders, etc an amount of tax, “the deferred tax”, is calculated according to one of two possible formulae.

Where the investor is chargeable in respect of interest on a “receipts basis” the formula —

A – B – C.

Where the investor is chargeable in respect of interest on an “accruals basis” the formula —

A – B.

In both cases —

A

is the tax due apart from this section.

B

is the tax due as if the “exchange” was not recognised for tax purposes but, in a case where the investor is charged on an accruals basis, it includes tax on interest accrued in that period.

C

is the tax on accrued interest earned but not yet received by the investor and which is built into A. This is because the market value at the date of exchange includes this accrued interest.

The “receipts basis” means any interest received in a chargeable period is brought into charge in that period.

The “accruals basis” means that interest earned though not necessarily received in a chargeable period is brought into charge. For example, where the chargeable period is a calendar year and interest of €10 is paid on 30 September each year, the amount brought into charge is the interest accrued from 1 January to 30 September in that year (€7.50) plus a further amount of interest accrued between 1 October and 31 December in the same year (€2.50). On an ongoing basis there should not be any material difference in the amounts brought into charge on either basis.

The formula A – B – C produces the correct result for persons assessable on a “receipts basis”, the purpose of which is to isolate what is known as the “clean price” gain (not including any accrued interest), calculate the tax on this and defer this amount of tax.

(3) The alternative formula A – B applies to persons chargeable to tax on interest on an “accruals basis”. The meaning of “B” in this situation is refined to ensure it includes the interest accrued in that chargeable period. In this situation both “A” and “B” contain the tax on interest accrued from the start of that chargeable period or the date of purchase of the old security, whichever is later, to the day the exchange takes place. The difference between A and B in these circumstances is, in fact, the tax on the “clean price” gain. It is, therefore, not necessary to include “C” in this formula.

(4) The calculation of accrued interest referred to in “C” is provided for.

(5) The investor may elect that these provisions apply and consequently the amount of “deferred tax” is excluded from the tax computation for the chargeable period in which the exchange takes place. This tax is deferred until the chargeable period in which the new securities are either disposed of or redeemed, whichever is earlier, and is payable in addition to the other tax due for that chargeable period. The rules of Self Assessment (Part 41A) apply accordingly.

Tax treatment: Non-traders

(6) In the case of non-traders —

  • If an investor so elects, then, subject to section 815 (bond washing), the capital gains tax liability is calculated but deferred until either the new securities are sold or redeemed, whichever is earlier.
  • Section 815 applies to the accrued interest and, with the modified use of the section as referred to in paragraph (b), undertakings for collective investment and the life funds of life assurance companies are also included. The bondwashing legislation does not normally apply to undertakings for collective investment or the life funds of life assurance companies because of the special tax treatment which applies to these institutions. However, for the purposes of this exchange programme alone, such institution are effectively made subject to section 815 in order that the accrued interest can be charged to tax immediately.

Time limit for elections

(7) The election referred to in subsections (5) and (6) must be made within 2 years. This election affords an investor the option of applying this section to a particular transaction and so defer a tax liability. Otherwise any gain accruing on the exchange is taxed immediately. This latter option might be taken if the investor was likely to make a loss on the transaction.

Cessation

These special tax rules do not apply to bond exchanges which occur after 31 December, 1999.

Relevant Date: Finance Act 2021