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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Derivative contracts: chargeable gains on derivatives: land or tangible moveable property (S643)

Contracts relating to land or certain tangible moveable property

Although land was an excluded subject matter when the derivative contracts legislation was enacted in 2002, it ceased to be so for relevant contracts entered into after 1 August 2004 in an accounting period ending on or after 17 September 2004. Since, however, property held by a company other than as trading stock will be a chargeable asset, it was felt appropriate to apply similar ‘capital gains’ treatment to property derivatives.

The legislation was amended by Finance Act 2013 for accounting periods beginning on or after 5 December 2012, to restrict the circumstances in which this capital treatment is applied. In particular, capital treatment is not available where the parties to the derivative contract are connected persons. Where capital treatment is not available, credits and debits arising on derivative contracts are brought into account in the same way as loan relationships credits and debits (CFM51000+).

For the purposes of the amendments in FA 2013, an accounting period is deemed to start on 5 December 2012.

Thus ‘annual capital gains’ treatment under CTA09/S641 applies to gains and losses where all of the following conditions (under S643) are satisfied:

  • Condition A: The underlying subject matter (USM) of the contract must be land, or tangible moveable property (apart from commodities), or a mixture of both. The inclusion of chattels allows derivatives to be based on price movements of a portfolio of property, without the need to worry about whether plant in the property (such as escalators, central heating systems and so on) is a fixture and therefore part of the land, or a chattel.
  • Condition B: The contract must not be held for trading purposes (unless the company is a mutual trading company, or holds the contract for the purposes of life assurance business). Property derivatives held for trading purposes - for example, by a bank or a property development company using a derivative to hedge land held as trading stock - will give rise to trading profits and losses. But ‘trade’, in this context, does not extend to a property investment business.
  • Condition C: The company must not be an authorised unit trust, an investment trust, an open-ended investment company or a venture capital trust (these are ‘excluded bodies’ as defined under CTA09/S706).
  • Condition D: From 5 December 2012, no two or more of the parties to the derivative contract are connected persons. Connected persons are defined in section 1122 of CTA 2010.

Tax treatment (CTA09/S641)

Where all of the conditions are met, credits and debits on the derivative are brought into account as capital gains or allowable losses under S641 (see CFM55030). There is an example at CFM55090.

Subordinate income (CTA09/S644)

If the USM includes income from property falling within condition A above, and that income is ‘subordinate income’, it is left out of account in determining whether condition A is met.

‘Subordinate income’ is income that is:

  • subordinate in relation to so much of the USM of the contract as consists of property within condition A; or
  • of ‘small’ value in comparison with the value of the USM as a whole.

‘Small’ is not defined but HMRC will regard an amount of 5% or less as ‘small’.

Whether part of the USM is subordinate or small is to be determined by reference to the time when the company enters into or acquires the contract (S644(4)).