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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Futures: artificial transactions in futures/options

Futures and options can be used to generate a guaranteed return which is, in economic terms, equivalent to interest. Without special rules any profits on such transactions would however (except where income treatment already applies) be liable to Capital Gains Tax. This may be beneficial to the recipient because

  • chargeable gains may be covered by existing capital losses; or
  • in the case of gilt futures and options held by individuals and trusts, any gains are not chargeable because of TCGA92/S115 (1), see CG54900, and CG56090.

Chapter 12 Part 4 ITTOIA05 (and previously ICTA88/Sch5AA) counters such arrangements. It applies where there is a disposal of a future or an option which is one of two or more related transactions which are designed to produce a guaranteed return (comprising the return from that disposal, or a number of disposals of the futures or options taken together).

For companies, with effect for accounting periods beginning on or after 1 October 2002 these provisions were superseded by the derivative contracts regime now in Part 7 CTA09.

Where these rules apply, any profits on the futures or options are charged as income, rather than capital gains. Miscellaneous income is listed in ITA07/S1016 and includes income chargeable under Chapter 12 Part 4 ITTOIA05. Any losses are similarly deducted from miscellaneous income.

The rules in Chapter 12 Part 4 ITTOIA05 apply to commodity or financial futures, and traded or financial options but cover a wider range of cases than those within TCGA92/S143.

Detailed guidance may be found at SAIM7010+.