Commentary on Sections Overview Chapter 2: Accrued income profits and losses Section 648: Strips of gilt-edged securities
1907.This section provides special rules for exchanges of gilt-edged securities for strips of such securities (and vice versa). It is based on section 722A of ICTA.
1908.Where a gilt-edged security is “stripped”, subsection (1) treats the exchange as a transfer by the person who held the gilt-edged security but no one is treated as the transferee (see subsection (2)). The strips themselves are not within the accrued income scheme regime and any disposals of strips are dealt with under the rules relating to deeply discounted securities (see Chapter 8 of Part 4 of ITTOIA).
1909.Where strips are consolidated into a gilt-edged security (by exchanging the strips for a newly issued gilt-edged security), subsection (3) treats the acquisition of the gilt-edged security as a transfer to the person acquiring the single gilt-edged security but no one is treated as the transferor (see subsection (4)). The disposal of the strips is dealt with under the deeply discounted securities regime.
1910.For both kinds of transfer the settlement day for the transfer is the day on which the securities are transferred (see section 674(4)).
1911.The reference in subsection (5) to the time “after the balance has been struck for a dividend on the security” is to the time when the security goes ex-dividend in respect of the next interest payment day. Interest at the next interest payment date will go to the person registered as entitled to the security at that date, so an exchange after that date is treated as a transfer without accrued interest.
1912.Where a gilt-edged security is “stripped”, although the security itself may be cancelled part of the way through an interest period, the formulas in sections 632(5)(b) and 633(5)(b) still work because they operate by reference to interest periods of securities of that kind. The assumption is that there will always be unstripped gilt-edged securities of the same kind as the stripped security. If not, however, section 673(4) deals with the possibility of all gilt-edged securities of a particular kind being stripped.
1913.Where strips are consolidated into a gilt-edged security, the consolidated security may be issued part way through an interest period for securities of that kind. As the consolidated security is fully fungible with other securities of the same kind, that interest period is taken (by virtue of the general rule in section 673(1)) to have begun immediately after the last interest payment day before the settlement day. (See Change 106 in Annex 1 which amends the meaning of “interest period” for the purposes of that section.) The formulas in sections 632(5) and 633(5) can work on that basis because they operate by reference to interest periods of securities of that kind.
1914.Subsection (7) disregards as transfers transactions between the person making the exchange and the market maker (that is, the only type of person authorised by the rules of the market to facilitate the exchanges in question). So the market maker is not a transferee for the purposes of the accrued income scheme in respect of such exchanges.
1915.The definition of “gilt-edged security” is that in section 1024.