Redemption payments -

The Court of Appeal (CA) has made short work of a case where loan stock was issued without interest but with a right to redemption proceeds of 7.25% per annum on the principal amount. The outcome is not surprising given the drafting that was used, with the CA judge wondering why he had agreed to hear the case in the first place.

The CA found that the authors of the conditions of the notes had done just about all they could to point to the redemption proceeds as interest. It was paid by reference to an underlying debt, at a stipulated rate, by reference to time elapsed and accrued daily. the loan stock was not therefore a relevant discounted security (under the rules now in ITTOIA 2005 Part 4) and no loss arose to the taxpayer on its transfer (see Nicholas Pike v HMRC [2014] EWCA Civ 824, reported in Tax Journal, 27!June 2014).

Guidance in the HMRC manuals suggests that a premium on redemption is not interest. Although this was noted by the lower courts, it was not enough to overcome the clear language used in this case which permitted the CA to characterise the payment as interest.

Originally published on www.taxjournal.com on 18 July 2014.