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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Futures: financial futures: contracts for differences: example

In both examples below, the shares in ABC Plc stand at £5 per share at commencement.

Example 1

An investor expects the shares to rise, and enters into a long position over 20,000 shares. He puts up a deposit of £20,000 (20% of the full value of £100,000). The broker who is counter-party to the deal debits the investor’s account with “interest” on the unpaid balance of £80,000 at 0.75% per calendar month (£600 per month). After two months, the company pays a dividend of 2p per share, and the broker credits the account with £400 (equivalent to the dividend on 20,000 shares).

After three months the shares stand at £6.50 per share, and the investor closes out the contract. The increase in value of 20,000 shares over the life of the contract is £30,000, and this is credited to the investor’s account. The broker also charges commission of £500.

In summary, the account is as follows:

Deposit £20,000
   
Less “interest” - 3 months @ £600 pm £ 1,800
  £18,200
Plus “dividend” £ 400
  £18,600
Plus increase in value of shares £30,000
  £48,600
Less commission £ 500
Final balance £48,100

The chargeable gain is £28,100, the difference between the amount deposited and the closing balance. This can be expressed as:

Increase in value of 20,000 shares   £30,000
     
Plus “dividend” equivalent   £ 400
    £30,400
Less “interest” charges £1,800  
Commission £ 500 £ 2,300
Net gain   £28,100

If the shares had decreased in value to £4.50, the decrease in value of 20,000 shares (£10,000) would be debited from the account.

At close, the account would then be:

Opening deposit £20,000
   
Less “interest” as above £ 1,800
  £18,200
Plus “dividend” £ 400
  £18,600
Less decrease in share price £10,000
  £ 8,600
Less commission £ 500
Closing balance £ 8,100

The allowable loss is £11,900, the difference between the amount deposited and the closing balance. This can be reconciled:

Decrease in price of 20,000 shares £10,000
   
Plus “interest” charges £ 1,800
Commission £ 500
  £12,300
Less “dividend” £ 400
Net loss £11,900

Example 2

The investor expects the shares to fall. He enters into a short position over 20,000 shares. Once again, he deposits £20,000, 20% of the value of 20,000 shares. The broker credits “interest” of £450 per month (based on an interest rate of 0.5625% per calendar month), and debits an amount equivalent to a dividend of 2p per shares paid on 20,000 shares.

After three months, the investor closes out the contract when the share price is £3.75 per share. His account is credited with the reduction in price of 20,000 shares (£25,000).

The summarised account is:

Opening balance £20,000
   
Plus “interest” for three months £ 1,350
  £21,350
Less “dividend” £ 400
  £20,950
Less commission £ 500
  £20,450
Plus reduction in share price £25,000
Closing balance £45,450

The investor has a chargeable gain of £25,450, the difference between the amount deposited and the closing balance. This can be reconciled:

Decrease in share price   £25,000
     
Plus “interest” credits   £ 1,350
Net gain   £26,350
Less “dividend” £400  
Commission £500 £ 900
    £25,450

If the investor was wrong, and the shares in fact increased in value to £5.75 per shares between the opening and closing of the contract, the account would be:

Opening balance   £20,000
     
Plus “interest” credits   £ 1,350
    £21,350
Less “dividend” charge £ 400  
Commission £ 500  
increase in value of 20,000 shares £15,000 £15,900
Closing balance   £ 5,450

The investor has an allowable loss of £14,550, the difference between the amount deposited and the closing balance. This can be reconciled as

increase in value of the shares £15,000
   
less “interest” credits £ 1,350
  £13,650
plus “dividend” charge £ 400
commission £ 500
  £14,550