Hi,
Investors buying Gilt-edged securities or 'gilts' are lending money to the government, known as the principal, which operates like an IOU. While waiting for the money to be repaid at a specified date in the future when the gilt matures, investors are paid interest at a fixed rate known as the coupon. This payment typically happens twice a year. Strips involve the separation of the interest ‘coupons’ from the underlying principal on which the interest is payable. Certain gilts, and other securities, are strippable in this way. The holder can surrender the gilt to the Bank of England, receiving in return a number of gilt strips, each of which is treated as a gilt in its own right. Each strip is simply a right to receive a payment at a future date. It carries no interest and therefore is like a zero coupon bond. Anyone buying a gilt strip would pay less than the redemption amount, how much less would depend on the period from purchase to redemption. You can see guidance here:
CFM37150 - Loan relationships: special types of security: gilt-edge securities: gilt strips
Deeply discounted securities (DDS) are government securities, commercial bonds and loan stock, where the amount paid on redemption is higher than the price at which they were issued. The difference is the discount and represents the whole or part of the reward to the holder of the security for the use of the money borrowed by the security issuer. Where certain conditions apply, the tax rules ensure that gains on such securities are taxed as income, rather than as capital gains. You can see the guidance here:
SAIM3010 - Deeply discounted securities: introduction
UK gains from DDS are declared in the supplementary page, SA101 box 3, and foreign gains from DDS at box 41 of supplementary page SA106 and where appropriate, claim a Foreign Tax Credit Relief in box 2.
Thank you.
