Derivative contracts: embedded derivatives: index-linked gilts
Derivatives embedded in index-linked gilts
CTA09/S623 applies where, in a period of account beginning on or after 1 January 2005,
- the index-linked component of an index-linked gilt-edged security is regarded for accounting purposes as an embedded derivative,
- it is not regarded as closely related to the host contract, so that it is accounted for separately, and for the purposes of Part 7 it is a contract for differences, and
- credits and debits on the host contract are non-trading credits or debits, in other words the gilt is not held as trading stock.
‘Index-linked gilt-edged security’ has the same meaning as in CTA09/S399 (CFM37100).
In such a case, CTA09/S415 will apply to the holder. For tax purposes, the gilt will be treated as a creditor loan relationship plus a contract for differences, and the latter will come within Part 7. CTA09/S623 provides that credits or debits on the contract for differences are not brought into account, thereby preserving the tax exemption for the index-linked element of the return from index-linked gilts.
Cases in which S623 applies will be rare, however. Most companies holding index-linked gilts will not account separately for the embedded derivative, since the inflation linked element will be regarded as closely related. The tax treatment will be that given by CTA09/S399. S623 will not be in point.