Income Tax (Trading and Other Income) Act 2005

Chapter 12 Disposals of futures and options involving guaranteed returns

Charge to tax under Chapter 12

555 Charge to tax under Chapter 12

(1) Income tax is charged on profits and gains from a disposal of a future or option that is a disposal involving guaranteed returns.

(2) Those profits and gains are treated as income for income tax purposes even if they would otherwise be taken to be a capital item.

556 Income charged

(1) Tax is charged under this Chapter on the full amount of profits or gains arising in the tax year.

(2) The profits and gains from a disposal are taken to arise when the disposal occurs.

557 Person liable

The person liable for any tax charged under this Chapter is the person realising the profits or gains.

558 Meaning of “future”, “option” etc.

(1) In this Chapter “future” means outstanding rights and obligations under a commodity or financial futures contract.

(2) In this Chapter “option” means—

(a) an option relating to—

(i) currency, shares, stock, securities or an interest rate, or

(ii) rights under a commodity or financial futures contract, or

(b) any other option which at the time of the disposal in question is listed on a recognised stock exchange or recognised futures exchange,

and includes any liability or entitlement under an option within paragraph (a) or (b).

(3) In this Act “recognised futures exchange” means the London International Financial Futures Exchange and any other futures exchange which is for the time being designated for the purposes of TCGA 1992 by order made by the Board of Inland Revenue under section 288(6) of that Act.

When disposals involve guaranteed returns

559 When disposals involve guaranteed returns

(1) For the purposes of this Chapter, a disposal of a future or option involves guaranteed returns if conditions A to C are met.

(2) Condition A is that the disposal is one of two or more related transactions (see section 566).

(3) Condition B is that those transactions are designed to produce a guaranteed return (see subsection (5)).

(4) Condition C is that the guaranteed return comprises—

(a) the return from the disposal (see section 561), or

(b) the return from a number of disposals of futures or options, of which the disposal is one, taken together.

(5) For the purposes of this Chapter, two or more related transactions are transactions designed to produce a guaranteed return if, taking them together, it would be reasonable to assume from one or more of the matters specified in subsection (6) that—

(a) the main purpose of the transactions is or was the production of a guaranteed return from one or more disposals of futures or options (see section 560), or

(b) that is or was one of their main purposes.

(6) Those matters are—

(a) the likely effect of the transactions,

(b) the circumstances in which the transactions are entered into, and

(c) the circumstances in which any one of the transactions is entered into.

(7) In the case of a transaction which is a disposal, the references in subsection (6) to entering into the transaction are references to making the disposal.

560 Production of guaranteed returns

(1) For the purposes of this Chapter, a guaranteed return is produced from a disposal of a future or option if risks from fluctuations in the underlying subject matter are so eliminated or reduced as to produce a return from the disposal that meets conditions A and B.

(2) If there is more than one such disposal, a guaranteed return is produced from them if, taking them together, such risks are so eliminated or reduced.

(3) Condition A is that the amount of the return is not to any significant extent attributable (otherwise than incidentally) to any such fluctuations.

(4) Condition B is that the return equates, in substance, to the return on an investment of money at interest.

(5) For the purposes of subsections (1) and (2), the cases where risks from fluctuations in the underlying subject matter are eliminated or reduced include any case where the main reason or one of the main reasons for the choice of that subject matter is—

(a) that there appears to be no risk that it will fluctuate, or

(b) that the risk that it will do so appears insignificant.

(6) In this section the references, in relation to a disposal of a future or option, to the underlying subject matter are references to, or to the value of, the commodities, currencies, shares, stock or securities, interest rates, indices or other matters—

(a) to which the future or option is referable, or

(b) to the value of which it is referable.

561 The return from one or more disposals

(1) In this Chapter, references to the return from one or more disposals are references to the return on investment represented by—

(a) the total net profits and gains arising from the disposal or disposals, or

(b) all but an insignificant part of those net profits and gains.

(2) For the purposes of subsection (1), if there are two or more disposals, it is to be assumed that profits and gains realised, and losses made, by persons who are associated with each other are all realised or made by the same person.

(3) For the purposes of subsection (2), persons are associated with each other in relation to any two or more disposals if conditions A to C are met.

(4) Condition A is that the disposals are made in pursuance of the same scheme or arrangements.

(5) Condition B is that each of the persons shares or is to share in the net return represented by the total of all the profits, gains and losses realised or made on the disposals.

(6) Condition C is that the extent of the persons' shares is determined for the purposes of, or in accordance with, the scheme or arrangements.

(7) For the purposes of this section—

(a) “scheme or arrangements” includes understandings of any kind, and

(b) it does not matter whether any scheme or arrangements are legally enforceable.

When disposals of futures and options occur

562 When disposals of futures and options occur: general

(1) Any question whether there is a disposal for the purposes of this Chapter, or as to when such a disposal is made, is to be determined—

(a) in accordance with sections 143(5) and (6), 144 and 144A of TCGA 1992 (closing out and settlement of futures contracts and rules in relation to options),

(b) otherwise in accordance with the provisions having effect for determining for the purposes of TCGA 1992 whether or when an asset has been disposed of, and

(c) on assumptions A to C.

(2) Assumption A is that all futures are assets for the purposes of TCGA 1992.

(3) Assumption B is that the words “in the course of dealing in commodity or financial futures” are omitted from section 143(5) and (6) of TCGA 1992 in each place where they occur.

(4) Assumption C is that any reference in TCGA 1992 to a financial option within the meaning given by section 144(8) of that Act is a reference to any option that at the time of the disposal in question is not listed on a recognised stock exchange or recognised futures exchange (regardless of whether the conditions in section 144(8)(c)(i) to (iv) of that Act are met).

(5) Subsection (1) is subject to section 563 (timing of certain grants of options where related disposals occur later), and see also section 564 (deemed disposal where futures run to delivery or options are exercised).

563 Timing of certain grants of options where related disposals occur later

(1) For the purpose of this Chapter, a disposal consisting in the grant of an option (“the grant”) is treated as taking place at a later time than it would be taken as occurring under section 562 if conditions A to C are met.

(2) Condition A is that the grant is one of a number of related transactions designed to produce a guaranteed return.

(3) Condition B is that at least one of the other transactions is a transaction entered into after the grant.

(4) Condition C is that one or more of the transactions entered into after the grant is a disposal which is not itself the grant of an option.

(5) The grant is treated as taking place when the first such later disposal takes place.

(6) Subsection (5) does not apply in any case where, by applying sections 144(2) and 144A(2) of TCGA 1992, section 562(1)—

(a) requires the grant of an option and the transaction entered into by the grantor in fulfilment of the grantor’s obligations under the option to be treated as a single transaction, or

(b) determines when such a single transaction is to be treated as entered into,

and that requirement or determination has a different effect from subsection (5).

564 Deemed disposal where futures run to delivery or options are exercised

(1) This section applies if there are two or more related transactions (see section 566) in relation to which conditions A and B are met.

(2) Condition A is that one of the transactions is the creation or acquisition (by the making or receiving of a grant or otherwise) of a future or option.

(3) Condition B is that the other transaction or one of the other transactions—

(a) is the running of the future to delivery or the exercise of the option, and

(b) is not treated for the purposes of this Chapter as a disposal of a future or option.

(4) In relation to the parties to the future or option, this Chapter applies as if—

(a) a disposal of the future or option takes place at the time (“the relevant time”) immediately before the future runs to delivery or, as the case may be, the option is exercised, and

(b) the scheme or arrangements by reference to which the transactions are related transactions provide for the disposal.

(5) In the case of a person whose rights and entitlements under the future or option have a market value at the relevant time, the disposal referred to in subsection (4)(a) is taken to be for a consideration equal to that market value.

(6) In the case of any other party to the future or option (“P”), the disposal is taken—

(a) to be made for a nil consideration, and

(b) to involve P in incurring costs equal to the release amount.

(7) In subsection (6) “the release amount” means the amount which P might reasonably have been expected to pay, in a transaction at arm’s length entered into at the relevant time, for the release of P’s obligations and liabilities under the future or option.

(8) Section 144(2) and (3) of TCGA 1992 are ignored for the purposes of subsections (1) to (3).

565 Interpretation of section 564

(1) References in section 564 to the running of a future to delivery are references to performing (and so discharging) the obligations owed under the commodity or financial futures contract in question to the party to the future whose rights as a party relate to the underlying subject matter.

(2) In subsection (1) the reference to the underlying subject matter is a reference to, or to the value of, the commodities, currencies, shares, stock or securities, interest rates, indices or other matters—

(a) to which the future is referable, or

(b) to the value of which it is referable.

(3) In section 564 and this section “party”, in relation to a future or option, means one of the persons who—

(a) has any right or entitlement comprised in or arising under the future or option, or

(b) is subject to any obligation or liability so comprised or arising.

(4) In section 564 “market value” has the same meaning as in TCGA 1992 (see sections 272 to 274).

566 When transactions are related

(1) For the purposes of this Chapter, two or more transactions are related if all of them are entered into in pursuance of the same scheme or arrangements.

(2) For this purpose the cases where any two or more transactions are to be taken to be entered into in pursuance of the same scheme or arrangements include any case where it would be reasonable to assume from one or more of the matters specified in subsection (3) that none of them would have been entered into independently of the others.

(3) The matters are—

(a) the likely effect of the transactions,

(b) the circumstances in which the transactions are entered into, and

(c) the circumstances in which any one of the transactions is entered into.

(4) Nothing in this Chapter prevents transactions from being related transactions just because they are transactions—

(a) with different parties, or

(b) with parties different from the parties to the scheme or arrangements in pursuance of which they are entered into.

(5) In the case of a transaction which is a disposal, the references in this section to entering into the transaction are references to making the disposal.

(6) In this section “scheme or arrangements” includes schemes, arrangements and understandings of any kind, whether or not they are legally enforceable.

Losses

567 Losses

(1) This section applies if—

(a) losses are made by a person from a disposal, and

(b) had profits or gains arisen to the person from the disposal, they would be chargeable under this Chapter.

(2) The losses are not to be brought into account for income tax purposes, except where section 392 of ICTA (losses from miscellaneous transactions) applies.

(3) For the purposes of that section, the losses are taken to be made at the time when the disposal occurs.

(4) For the treatment of the losses for capital gains tax purposes, and how TCGA 1992 applies where a profit arises or a loss is made from a deemed disposal under section 564(4), see sections 148A to 148C of that Act.

Trustees

568 Special rule for certain income of trustees

(1) This section applies if the profits or gains charged under this Chapter and arising to trustees do not meet any of conditions A to C.

(2) Condition A is that the profits or gains fall to be treated for income tax purposes as income of a settlor.

(3) Condition B is that the profits or gains arise under a trust established for charitable purposes.

(4) Condition C is that the profits or gains are from property held for the purposes of a superannuation fund to which section 615(3) of ICTA applies.

(5) The profits or gains are to be treated for income tax purposes as if they were income to which section 686 of ICTA applies (accumulation and discretionary trusts: special rates of tax).

(6) In this section “trustees” does not include personal representatives, but where, during or at the end of the administration period, personal representatives pay trustees any sum representing profits or gains to which this section would apply if the personal representatives were trustees, that sum is treated as—

(a) being paid as income, and

(b) having borne income tax at the applicable rate.

(7) In subsection (6)—

(a) “administration period” has the meaning given by section 653, and

(b) “the applicable rate” means the rate referred to in section 663(1) (the applicable rate for grossing up basic amounts of estate income).

Transfer of assets abroad

569 Anti-avoidance: transfer of assets abroad

(1) This section applies if profits or gains arising from a transaction to which this Chapter applies are realised by a person (“A”) who is resident or domiciled outside the United Kingdom.

(2) For the purpose of determining whether an individual ordinarily UK resident is liable for income tax in respect of the profits or gains, sections 739 and 740 of ICTA (transfer of assets abroad) have effect as if the profits or gains, when realised, constituted income becoming payable to A.