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HMRC internal manual

Corporate Finance Manual

Derivative contracts: chargeable gains on derivatives: land or tangible moveable property: example

Example applying to contracts entered into on or after 1 August 2004 in an AP ending on or after 17 September 2004.

In year ended 30 June 2008, a property company enters into a contract for differences based on a reference portfolio of commercial property. The contract has a maturity of three years and a strike of 6%. In other words, the company believes that the value of the portfolio (looking at the capital value only) will rise by more than 6% over the period.

The portfolio is professionally valued at the start and end of the contract. Its initial value is £10 million. If the final value were, say, £11 million - the value had risen by 10% - the counterparty would pay the company (10% - 6%) x £10 million = £400,000. If on the other hand the value increases by less than 6%, or falls, the company must make a similarly calculated payment to the counterparty.

The company accounts for the contract at fair value, and in the year ended 30 June 2008 its accounts show an increase of £270,000 in the fair value of the contract.

The underlying subject matter of the derivative contract is land (and possibly also chattels). The contract comes within CTA09/S643. As a result, the non-trading credit of £270,000 is - under S641 - brought into account as a chargeable gain for year ended 30 June 2008.