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Profit From Sale Of Floating Rate Notes Was Income And Not Capital In Nature

By Mark McLaughlin, June 2015
The appellant bought a floating rate promissory note (FRN) in December 2001 from Kleinwort Benson Private Bank (KB). He sold the FRN in September 2003 at a profit of £2.211 million. 

The issue was whether the profit was of an income nature and subject to tax under (what was then) Schedule D Case III. By contrast, if the profit was of a capital nature, it was not liable to income tax, and was also exempt from capital gains tax as a gain on the disposal of a qualifying corporate bond. The First-tier Tribunal ([2013] UKFTT 176 (TC)) held that the profit was of an income nature. The appellant appealed.

The FRN was a normal commercial security, which had been issued at par (£30.024 million) by ANZ Bank. It was also redeemable at par, and carried interest in the meantime. However, when the appellant bought the FRN from KB (for £27.786 million), interest coupons had been stripped from it. Thus the price paid
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