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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Derivative contracts: relevant contracts: contracts that cannot be contracts for differences

Instruments specifically excluded

Certain sorts of contract that you would not normally think of as derivatives might still fall within the definition of a contract for differences (CFD). CTA09/S582(2) specifically excludes some types of contract. It provides that

  • futures
  • options
  • loan relationships
  • contracts of insurance
  • capital redemption policies (defined under CTA09/S710 as a contract made in the course of capital redemption business under section 431(2ZF) ICTA88)
  • contracts of indemnity
  • guarantees, and
  • warranties

are all excluded from being CFDs.

The inclusion of futures and options in this list means that futures and options on the one hand, and CFDs on the other, are mutually exclusive categories. Many of the remaining types of contract would, in any case, be outside the derivative contract rules on the basis of the accounting test in CTA09/S579 - see CFM50200 onwards.


Habwar Ltd is a mortgage lender, which makes equity release loans to elderly homeowners. The company lends the homeowner up to 25% of the market value of their property, at a low rate of interest. If the homeowner dies, Habwar Ltd receives from his or her estate the principal sum lent, plus an amount calculated by reference to any increase in the market value of the house. For example, if the homeowner borrows £50,000 at a time when the house is worth £200,000, and the property is worth £300,000 when he or she dies, Habwar Ltd receives repayment of £50,000 plus a premium of £25,000 (25% of the difference between £300,000 and £200,000). If the house is only worth £180,000, the company receives back only £50,000. If the homeowner sells the house, the loan is repaid in a similar way.

The contract between Habwar Ltd and the homeowner is a loan relationship of the company - there is a money debt which arises from the lending of money. But the loan agreement might also fall into the definition of a CFD, because it enables Habwar Ltd to make a profit if the value of the house increases. The contract, viewed as a whole, is however excluded from being a derivative contract because of CTA09/S582(2)(h) (it is a loan relationship).

It is possible that Habwar Ltd may, for accounting purposes, view the ‘property-linked’ element of the loan as an embedded derivative that is not closely related to the host contract, and account separately for this embedded derivative. If this is the case, CTA09/S585 will treat the embedded derivative as a relevant contract (see CFM50420). Nothing in CTA09/S582(2) prevents this embedded derivative from being a CFD.