Finance Act 2013

Finance Act 2013

2013 CHAPTER 29

Introduction

Section 41: Derivative Contracts: Property Total Return Swaps Etc

Summary

1. Section 41 responds to tax avoidance schemes involving property return swaps. Property total return swaps utilise the legislation in Corporation Tax Act 2009 (CTA 2009) which applies to swap contracts relating to land or to an index over the value of land. This section amends the legislation to prevent these provisions from being used to produce losses which are unrelated to real exposure to movements in property prices.

Details of the Section

2. Subsection (1) provides that Chapter 7 of part 7 of CTA 2009 is amended.

3. Subsection (2) inserts a new subsection 4A into section 643 of CTA 2009 and substitutes “and C” with “C and D” in subsection (1). Where section 643 and related provisions apply, the return from certain derivative contracts, relating to land or tangible movable property other than commodities is charged to corporation tax on chargeable gains.

4. Subsection 643(4A) introduces a new condition D, so that derivative contracts will only fall within section 643 if condition D is met.

5. Subsection (3) inserts new subsections (8) and (9) into section 650 of CTA 2009. Where that section and related provisions apply, the return from certain contracts involving a capital value index over land, and also involving interest rates, is charged to corporation tax on chargeable gains.

6. Subsection 650 (8) introduces a new condition G which must be met for section 650 to apply to a derivative contract.

7. Subsection 650 (9) introduces a new condition H which must be met for section 650 to apply to a derivative contract.

8. Subsection (4) adds a new subsection 4A to section 659. Section 659 includes a formula in subsection (4) which sets how to calculate credits or debits which are to be charged to corporation tax on chargeable gains.

9. New subsection 659(4A) provides that where a derivative contract has the effect that the return arising from a contract is lower (i.e. closer to zero, or zero) than the actual change in the index over that period, then for the purposes of the formula in section 659(4), the figure for R% is the actual return, and not the movement in the index.

10. Subsections (5) and (6) provide for commencement of the amendments to Chapter 7 of Part 7. They provide that the amendments have effect in relation to accounting periods beginning on or after 5 December 2012. An accounting period beginning before, and ending on or after 5 December 2012, is to be treated as if so much of the period as falls before that date, and so much of the period as falls on or after that date, were separate accounting periods, for the purposes of the amendments provided for by subsection (1).

Background

11. The amendments made by this section prevent use of the property total return swaps legislation to obtain tax advantages. In many circumstances, returns from swaps entered into by companies are taxed or relieved as income. However in some circumstances where the swap has an underlying subject matter of land, or an index of changes in the value of land, a return can be taxed or relieved as capital.

12. This legislation is being used within groups of companies, in effect to convert capital losses into income losses, by entering into swaps between different members of the group, although overall the swap does not result in the group getting any net exposure to property. The new legislation will rule out any capital return where swaps are intra-group.

13. The formula used in the legislation is also being exploited in an attempt to generate capital gains which exceed those actually arising from the swap. The legislation will limit any capital return to the actual return under the contract.