815 Taxation of income deemed to arise on certain sales of securities

Summary

This section counters a practice known as “bond washing” whereby securities are sold before the payment of interest so that the interest accrues to the holder as a capital gain rather than as income. The person selling the securities is liable for tax in respect of the interest which is deemed to have accrued on a day to day basis up to the date of sale. This provision does not apply in certain circumstances including, if the security has been held by the same owner for a continuous period of at least 2 years, or where the seller is a dealer in securities the profits of whose trade are assessed to tax under Case I of Schedule D.

Details

Definitions

(1) “owner” is defined so as to cover the beneficial holder of securities where such securities are registered in the name of a nominee.

“securities” includes —

• assets which are not chargeable assets for capital gains tax purposes by virtue of section 607 (government and certain other securities), and
• stocks, bonds and obligations of any government, corporation, company or other body corporate,

but does not include company shares.

The charge to tax

(2)(a) Where the owner of a security sells or transfers the security and interest on it is receivable by someone other than that owner, interest is deemed to have accrued to that owner on a day to day basis from the date the owner acquired the security and the owner is charged to tax under Case IV of Schedule D on that interest up to the date of disposal of the security or if later, the date of receipt of the consideration for the disposal.

(2)(b) Depending on the period for which a person holds the security, the person may have actually received interest payments on it which are chargeable to tax in the normal way. The deemed interest will be reduced to reflect this.

(2)(c) If the owner arranges to re-acquire a security subsequent to its disposal, the charge will be based on the interest deemed to have accrued up to the next interest date following the sale.

(2)(d) If the owner subsequently re-sells the security, interest chargeable in respect of that subsequent resale will be deemed to have arisen only from that next interest date, that is, the date up to which the owner was last charged to tax; by not going back, in this instance, to the date of reacquisition, a double charge to tax is avoided.

Exclusions from the charge to tax

(3) There are a number of exclusions from the charge imposed by this section on an owner in respect of a gain arising on a sale or transfer of a security. The charge does not apply —

• where the security has been held for a continuous period of 2 years by the same owner; personal representatives are entitled to take into account the period the deceased held a security in calculating the 2 year period,
• where the seller of the security is a dealer in securities, so that the proceeds of the disposal are taken into account in calculating the profits of the dealing trade (such profits are chargeable under Case I of Schedule D in the normal way),
• where the owner is an undertaking for collective investment (as described in section 738) and any gain or loss accruing is a chargeable gain or an allowable loss,
• where the sale is between spouses or civil partners who, for income tax purposes, are treated as living together, or
• where the interest payment on the security is treated as a distribution under the Corporation Tax Acts.

Buy back or reacquisition of securities

(4) The meaning of buying back or re-acquiring a security in subsection (2)(c) is expanded to include buying back or re-acquiring a similar security and it is indicated how securities are to be regarded as similar. This is an anti-avoidance provision to forestall any attempt to avoid the increased charge under subsection (2)(c) by buying a similar instead of the same security.

Last in, first out rule

(5)(a) In a case where securities of the same class are bought at different times, the “last in, first out” principle is applied, so that a sale is treated as deriving from the latest purchase (this is relevant in determining the period of 2 years referred to in subsection (3)(a)).

Securities of same class

(5)(b) Securities are to be regarded as being of the same class where they entitle their owners to identical rights against the issuer of the securities.

Information

(6) To enable an inspector to measure any charge arising on deemed income under this section, the inspector may call for disclosure of relevant information and this may be requested from the person who issues a security and an agent of such a person as well as from the owner of the security.

Relevant Date: Finance Act 2021