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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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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.