Commentary on Sections Structure of Chapters Overview Section 445: Strips of government securities: acquisitions and disposals
1793.This section provides the rules necessary for computing profits on the disposal of government securities. It is based on paragraph 14 of Schedule 13 to FA 1996.
1794.Subsection (1) is the first rule. It determines, by means of a formula, the acquisition cost where a gilt-edged security which is not a strip (and therefore under section 432(1)(b) not a deeply discounted security) is “stripped”. The acquisition cost of each strip is computed by apportioning the market value of the underlying security between all the strips acquired.
1795.Subsection (2), which contains the second rule, deals with a deemed transaction which counts as a disposal. This is the deemed transfer, followed by immediate reacquisition under subsection (3), of a strip held on 5 April.
1796.Paragraph 14(4) of Schedule 13 to FA 1996 provides for a deemed reacquisition on 6 April for the same value as the disposal on 5 April. This is rewritten as disposal and immediate reacquisition. See Change 87 in Annex 1.
1797.See paragraph 80 of Schedule 2 to this Act for the application of this rule for 2005-06.
1798.Subsection (5) ensures that incidental expenses are not allowed in respect of these deemed transfers even where they were incurred before 27 March 2003.
1799.The rules in subsections (2) to (5) ensure that anyone holding a strip of a government security is taxed year by year on the increase in value of the strip. This is intended to prevent investing in strips, rather than in unstripped government securities (where interest would be taxed year by year), to defer tax liability.
1800.Subsection (6), which contains the final rule, deals with the situation where two or more strips are brought together and turned into a single security. Each strip is disposed of for an amount equal to its market value on consolidation.
1801.Subsections (7) and (8) ensure that both the first and final rules take precedence over both the rule on timing and transfers in section 438 and the market value rules at sections 440(4) and 441.