How a structured product is taxed depends on its legal form, not its marketing name. The return on a structured deposit is paid by a bank on a cash deposit and is treated as savings income, while a capital at risk product issued as a security is taxed either as income under the deeply discounted securities rules or as a capital gain if it meets the narrow test for an excluded indexed security. Products that are options or other derivatives normally give capital gains or losses.

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What counts as a structured product?

A structured product is an investment whose return is set by a formula linked to something else, usually a share index such as the FTSE 100, a basket of shares, a commodity or an exchange rate. Two broad families are sold to UK investors:

  • Structured deposits. The FCA Handbook glossary defines a structured deposit as a deposit which is fully repayable at maturity on terms under which interest or a premium will be paid or is at risk according to a formula involving factors such as an index, a financial instrument, a commodity or a foreign exchange rate.
  • Capital at risk products. These are usually notes or securities issued by a bank. Your capital can fall if the underlying index falls below a set level, and the return may be a fixed amount if a condition is met (often called a kick out or autocall) or a share of the index rise.

HMRC’s Savings and Investment Manual at SAIM3040 warns that it is not always easy to say how such a product is taxed. Some, properly analysed, are options or contracts for differences; others create a debt. The tax answer follows that analysis.

How is the return on a structured deposit taxed?

A structured deposit is money placed with a bank and repayable in full. Income tax is charged on interest under section 369 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), and HMRC applies the legal meaning of interest set out at SAIM2030: the return or compensation for the use or retention of a sum of money belonging to another. A return paid by the bank on a capital protected deposit fits that description even though the amount is set by reference to an index.

A capital gain is not available as an alternative. Under section 251 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992), no chargeable gain accrues to the original creditor on a disposal of a debt unless it is a debt on a security, and a bank deposit is a simple debt. Equally, a structured deposit that returns only your capital produces no allowable loss, because section 16(2) TCGA 1992 applies the same exclusion to losses.

Timing follows the general interest rule. ITTOIA 2005 section 370 charges the full amount of interest arising in the tax year, and SAIM2440 explains that interest arises when it is received or made available. Where the terms do not allow access until maturity, the return arises and is taxed at that point. A five year plan can therefore produce one large amount of savings income in a single year, which may use up your Personal Savings Allowance and push part of the return into a higher band.

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When is a capital at risk product taxed as income?

Where the product is a debt security, start with the deeply discounted securities rules in Part 4 Chapter 8 of ITTOIA 2005. Under section 430, as summarised at SAIM3020, a security is a deeply discounted security if the amount payable on redemption will or may exceed the issue price by more than 0.5% for each year of the redemption period, capped at 15%. The word may is important: SAIM3020 Example 3 describes a five year FTSE 100 linked security with full capital protection and an index linked return as a deeply discounted security, even though there is no certainty about the redemption amount.

If the product is a deeply discounted security:

  • the profit on disposal, which includes redemption, is charged to income tax under ITTOIA 2005 section 428 in the year of disposal (SAIM3070);
  • the profit is the amount received less the amount paid, with no deduction for incidental costs (SAIM3070);
  • it is savings income under section 18 of the Income Tax Act 2007, so the Personal Savings Allowance and savings rates apply;
  • relief for losses was abolished for disposals on or after 27 March 2003, apart from limited transitional cases (SAIM3080), so a loss on redemption is usually wasted.

Any coupon paid on the security is taxed as interest in the ordinary way, separately from the redemption profit (SAIM3055).

When is the return a capital gain instead?

A security escapes the deeply discounted rules if it is an excluded indexed security under ITTOIA 2005 section 433. That requires the amount payable on redemption to be found by applying to the issue price the percentage change over the redemption period in the value of chargeable assets, such as shares, or an index of them. Section 433(2) allows capital protection only if the guaranteed minimum is no more than 10% of the issue price. HMRC explains at SAIM3050 that this means the investor must be able to lose at least 90% of the amount invested; otherwise the product is a deeply discounted security.

SAIM3050 adds that a product where principal is fully at risk if an index falls below a threshold is treated as having protection of 10% or less, provided there is a realistic prospect of that event happening. SAIM3055 says geared returns, such as twice the index rise, do not qualify, and the Retail Prices Index is not an index of chargeable assets. Excluded indexed securities are kept within the capital gains regime (CG53446), so gains use your annual exempt amount and are taxed at Capital Gains Tax rates, and losses can be allowable.

Products that are options or contracts for differences are not deeply discounted securities, and SAIM3040 states that disposal of an option gives rise to a capital gain or allowable loss. See options and capital gains for how those are computed.

Can HMRC treat a capital gain as disguised interest?

Yes, where the return is in substance an interest return. ITTOIA 2005 section 381A charges income tax on a return that is economically equivalent to interest, and is not otherwise taxed as income. That requires three things: the return is by reference to the time value of money, it is at a rate comparable to a commercial rate of interest, and at the outset there is no practical likelihood that it will not be produced, ignoring insolvency of the payer. SAIM2810 says that for index linked products the label is irrelevant; what counts is whether the specified index movements are practically likely to occur. A product dressed up as capital at risk where the condition for paying the return is almost certain to be met can be taxed as disguised interest.

How does this work in practice?

Illustration only. Tom invests £10,000 in each of three five year products linked to the FTSE 100, all of which pay out £12,500 at maturity.

Product Likely treatment Taxed on
Structured deposit with full capital protection Interest on a deposit £2,500 as savings income in the year of maturity
Bank note with full capital protection and an index linked return Deeply discounted security £2,500 as savings income in the year of redemption
Bank note paying the issue price times the index change, with capital fully at risk below a realistic barrier Excluded indexed security £2,500 as a capital gain, set against the annual exempt amount

If the index had fallen and each product returned less than £10,000, only the third would give an allowable capital loss. The second would give no relievable loss, and the first could not lose capital at all.

What mistakes do investors make?

  • Relying on the product name. Plan, bond, note and deposit are marketing terms. Read the terms to see whether you hold a deposit, a debt security or an option.
  • Reporting a redemption profit as a capital gain. Unless the product is an excluded indexed security or an option, the profit is usually income.
  • Claiming a capital loss on a deeply discounted security. Relief for such losses is generally unavailable.
  • Missing the year of charge. A deposit return locked away until maturity is taxed when it arises, often all in one year, which can affect the starting rate for savings and allowances.
  • Forgetting the rate change. Savings rates rise for 2027 to 2028: Finance Act 2026 sets the savings basic, higher and additional rates at 22%, 42% and 47%, so the year a product matures can change the tax. See savings income tax rates from April 2027.

Holding a product inside an ISA removes these questions for income tax and CGT, as GOV.UK confirms ISAs let you save tax free. Outside an ISA, keep the product terms and issuer documents, because HMRC’s view turns on the exact redemption formula.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.