Discounted securities

The taxpayer acquired flexi-notes from a bank for £27 786 000. Each contained a floating rate note issued by a corporate body from which the interest coupons were to be stripped when instructed by the bank.

The stripped coupons relating to a specified period – the flexi-note period – were retained for the benefit of the bank. The remaining interest coupons were reattached in September 2003 to the related floating rate notes which were sold by the bank on behalf of the taxpayer for £29 997 000 resulting in a profit of £2 211 000.

The taxpayer claimed the gains on the disposals of the floating rate notes did not arise from discounts from discounting transactions. He told HMRC that the flexi-notes were qualifying corporate bonds and the profits were in the nature of capital rather than income.

The matter progressed to the First-tier Tribunal where...