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HMRC internal manual

Company Taxation Manual

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HM Revenue & Customs
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Investment trusts: Loan relationships, derivatives and management expenses: Loan relationships and derivative contracts - capital

FA96/SCH10/PARA1A and FA02/SCH26/PARA38

Approved investment trusts are UK resident companies subject to corporation tax, but unlike other companies their gains are not chargeable gains [section 100(1) TCGA 1992]. For most companies the introduction of the loan relationships and derivative contracts regimes resulted in all profits and losses from loan relationships and derivative contracts being brought into account as income; without making any distinction between capital and revenue items. Special rules are therefore needed for approved investment trusts, to preserve the exemption from tax on capital profits.

Loan relationships

For loan relationships, these special rules are at paragraph 1A Schedule 10 FA 1996 as supplemented by regulations in SI 2006/1182.

Paragraph 1A(1) provides that capital profits, gains or losses arising to an approved investment trust from its creditor (i.e. asset) loan relationships must not be brought into account as credits and debits under the rules of the loan relationships regime.

Capital profits, gains and losses are defined in paragraph 1A(3) as those profits, gains or losses that are carried to or sustained by a capital reserve in the company’s accounts in accordance with the Statement of Recommended Practice: Financial Statements of Investment Trust Companies (the “SORP”), issued in January 2003 and revised in December 2005. If the company has adopted International Financial Reporting Standards (“IFRS”) or the equivalent modified UK GAAP, SI 2006/1182 defines capital profits, gains or losses as those that are accounted for through the capital column of the income statement in accordance with the SORP; or would have been so accounted for if the SORP had been applied correctly.

Derivative contracts

For derivative contracts, the special rules are at paragraph 38 Schedule 26 FA 2002 as supplemented by SI 2006/1182.

Paragraph 38(1) provides that capital profits, gains or losses arising to an approved investment trust from its derivative contracts must not be brought into account as credits and debits under the rules of the derivative contracts regime.

Capital profits, gains and losses are defined in paragraph 38(3) as those profits, gains or losses that are carried to or sustained by a capital reserve in the company’s accounts in accordance with the SORP. If the company has adopted IFRS or the equivalent modified UK GAAP, SI 2006/1182 defines capital profits, gains or losses as those that are accounted for through the capital column of the income statement in accordance with the SORP; or would have been so accounted for if the SORP had been applied correctly.

There is more guidance on these subjects at CFM14015+