55 Taxation of strips of securities

Summary

This section provides a tax regime for a form of financial instrument known as a strip. This regime applies to strips of all kinds (including strips of Irish Government securities).

A strip of an interest bearing security is created when the right to receive each interest payment and the right to receive the capital repayment on redemption is separated from other rights to receive payments in respect of the security (for example, a 3 year, €100 bond which bears annual interest of 4 per cent could be split into 4 separate securities, one yielding €4 at the end of year 1, one yielding €4 at the end of year 2, one yielding €4 at the end of year 3 and the fourth yielding €100 also at the end of year 3).

Where strips are created each strip can then be traded independently. Strips can also be reassembled or reconstituted back into the security from which they originated.

The section provides that the creation of a strip is deemed to be a disposal of the original security at its market value and an acquisition of the strip at an appropriate proportion of —

• the market value of the security at the time of creation in the case of a person carrying on a trade of dealing in securities, or
• the lower of the nominal value or the market value of the security at that time in the case of any other person.

Where a person who is not a dealer in securities acquires a strip which has already been created, the strip is treated as having cost the lower of the amount paid and the appropriate proportion of the nominal value of the security.

Reconstitution back into the original security is deemed to be a disposal of each of the strips at their market value at the time of reconstitution and an acquisition of the security at the aggregate market value of the strips which make it up.

For the purposes of the section, a strip is deemed to be a deep discount or zero coupon security (referred to in the section as a “non-interest-bearing security”). In normal circumstances any profits earned on such securities are taxed only when the securities have been disposed of or redeemed. The section, however, provides for a scheme of deemed disposal and reacquisition of strips at the end of each tax year, thus providing for tax to be levied on strips on an annual basis.

Details

Definitions

(1) The section contains a series of definitions, including —

“nominal value” which, subject to some minor exceptions, is generally the par value of the security.

“opening value” which, in the case where the security is held as part of a trade of dealing in securities, is the market value of the security at the time the strips were created and, in any other case, the lower of the nominal value and market value of the security at the time the strips were created.

Creation of strips

(2)(a) The creation of strips is regarded as a disposal of the original security at its market value.

(2)(b) Each strip, which makes up the security, is deemed to have been acquired at the time of creation for the appropriate proportion of the opening value of the security.

(2)(c) Each strip created is deemed to be a non-interest-bearing security chargeable under Case III of Schedule D unless it is charged under Case I of that Schedule as part of a trade of dealing in securities.

Acquisition of certain strips

(3) Where a person, other than a person carrying on a trade of dealing in securities, purchases (as opposed to creates) a strip of, broadly, an Irish Government security (that is, a security listed in section 607), the purchase price is deemed to be the lesser of the amount paid and a proportion of the nominal value of the security.

The proportion of the nominal value of the security is determined by —

• firstly, determining what would have been the market value of each of the strips had they been created on the day the security was issued, and
• secondly, determining the ratio which the market value of the strip at that time bears to the aggregate value of all the strips at that time and applying that ratio to the nominal value of the security.

Reconstitution of strips

(4) Reconstitution of a series of strips back into the original security is regarded as —

• a disposal at market value at the time of reconstitution of each of the constituent strips, giving rise to a charge to tax under Case III unless the transaction is charged under Case I as part of a trade of dealing in securities, and
• an acquisition of the original security at a price equal to the aggregate market value of the constituent strips.

Annual revaluation of strips

(5) Strips are deemed to be disposed of and reacquired by a person at the end of each tax year or accounting period, as appropriate, at the strips market value at that time, the profit being chargeable to income or corporation tax.

(6) Losses which arise solely under this deemed disposal provision may be offset against profits similarly arising. This applies only to persons chargeable under Case III since such a facility is already available under Case I.

Relevant Date: Finance Act 2019