Chapter 6: Income from FOTRA securities
Overview
2731.This Chapter provides for exemption from income tax in respect of United Kingdom government securities which are beneficially owned by persons who are not resident in the United Kingdom. Such securities are described as being “Free of Tax to Residents Abroad” or “FOTRA securities”. The sections are based on section 154 of FA 1996 and section 161 of FA 1998.
2732.The beneficial owner of a FOTRA security may be entitled to an exemption from income tax in any of the following three situations:
a person holding the security as an investment may be exempt from tax on the interest arising on the security;
a dealer holding the security in circumstances where a profit on sale would be regarded as a trading receipt may be exempt from tax on the interest arising on the security; or
a dealer holding the security in circumstances where a profit on sale would be regarded as a trading receipt may be exempt from tax on the profit arising from a purchase and sale of the security.
2733.It is not intended to rewrite section 22(1) of F(No 2)A 1931, section 60(1) of FA 1940 or section 154(1) of FA 1996. These provisions all concern the Treasury’s powers to issue securities. The first two provisions were left untouched in the 1952, 1970 and 1988 consolidations. (Section 47 of Finance (No 2) Act 1915 was repealed in 1927, but in terms to the effect that the repeal did not affect income tax exemptions attaching to securities previously issued.)
Section 713: Introduction: securities free of tax to residents abroad (“FOTRA securities”)
2734.This section sets out the scope of the Chapter. It is based on section 154(8) of FA 1996 and section 161 of FA 1998.
2735.Subsection (2) sets out the three different classes of FOTRA securities. Each class of FOTRA security has its own distinct rules.
2736.Subsection (3) to (6) define the term “the exemption condition” used in this Chapter. There are different definitions for each of the three classes of FOTRA securities in subsection (2).
Section 714: Exemption of profits from FOTRA securities
2737.This section sets out the conditions that must all be met if the exemption is to apply. It is based on section 154 of FA 1996. As the exemption can apply, in certain circumstances, to trading income as well as to interest (see overview to this Chapter), the general word “profits” has been used in subsection (1) rather than a more limited word such as “interest”.
2738.Subsection (6) deals with two exceptions from the general exemption in subsection (1). These exceptions apply whatever the exemption condition relating to the FOTRA security provides.
Section 715: Interest from FOTRA securities held on trust
2739.This section reflects an Inland Revenue practice to regard the interest from a FOTRA security held in trust as exempt (and the beneficial ownership test in the exemption condition as satisfied) where none of the beneficiaries of the trust is ordinarily resident in the United Kingdom at the time when the interest arises. See Change 116 in Annex 1. It is new. The section refers to “interest” and not “profits” because this reflects the Inland Revenue practice. It is not likely that trading profits or any other kind of income (apart from interest) could arise in respect of FOTRA securities held in trust.
Section 716: Restriction on deductions etc. relating to FOTRA securities
2740.This section prevents a deduction relating to a FOTRA security being taken into account for income tax purposes where the beneficial owner is exempt from tax. It is based on section 154(6) of FA 1996.
