Identification of deeply discounted securities (DDS)

SAIM3020 gives a specific definition of DDS (https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim3020). However, in may posts on this forum, it is implied that most US bonds are DDS despite not falling within the above definition. For everyone's benefit, I'd like to have some clarification using two examples. 1) US Treasury Note 0.25% 31JUL2025 - ISIN: US91282CAB72 (a real one) Coupon: 0.25% Date of issue: 31/07/2020 Issue price: 99.81 Face value: 100 Maturity date: 31/07/2025 In my interpretation this is *not* a DDS because the issue price was above 97.5 (calculated as 100 - 0.5% x 5 years). The difference between redemption/sell price and buy price will be taxed as capital gain, while the coupons are classed as interests. Could you confirm my interpretation? 2) On the other hand, assume a similar bond with Coupon: 0.25% Date of issue: 31/07/2020 Issue price: 97.00 Face value: 100 Maturity date: 31/07/2025 This is a DDS. So the difference between redemption/sell price and buy price will be taxed as income (according to own band). Could you confirm? Is the 0.25% coupon still considered as interest though? Please do not only link to the internal manual. Although your answers are not binding, they would help many of us understand HMRC position on these common cases. Thank you in advance.

Hi magnagatti cianch,
US Government bonds, sometimes known as T-bills or treasury bills are generally taxed as income rather than capital gains.
The return is paid at maturity rather than regular interest payments.
In the UK, these are known as deeply discounted securities, with the discount being the difference between the price at which they were issued and the price received at maturity.
On a foreign investment the income is the difference between the purchase and redemption price after each has been converted to sterling on the day the transactions took place, so includes any foreign exchange gains.
Losses cannot be deducted. 
Please have a look at:
SAIM3010 - Deeply discounted securities: introduction
For more information.
Thank you. 

 

Good morning. Could you please clarify? The definition of DDS does not say that. SAIM3020 states: "It is a security where the amount payable on maturity, or any other occasion when the security can be redeemed will or may exceed the issue price by more than 0.5% for each year in the redemption period, up to a maximum of 30 years." The T-Note (not a T-Bill) provided as example does not fall within the definition of DDS as it was issued with a discount of 0.19% and a maturity of 5 years. Could you please explain? Unless an explanation is given, I should assume that SAIM3020 is prevalent.

Hi magnagatti cianch,
These are government securities and 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.
Thank you. 

 

Which conditions? I want to know why example 1 should be classed as DDS.

Hi magnagatti cianch,
The guidance at SAIM3020 is HMRC definition of the legislation on the meaning of deeply discounted securities.  ‘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. 
Thank you.
 

Hi and thank you. As said in my first post I am aware of SAIM3020. In fact, the general rule is to consider a DDS if "the security can be redeemed will or may exceed the issue price by more than 0.5% for each year in the redemption period". Coming back to my examples, why example 1) should be considered a DDS?