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HMRC internal manual

Corporate Finance Manual

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Derivative contracts: chargeable gains on derivatives: property based total return swaps (S650)

Property-based total return swaps

A ‘property-based total return swap’ is one that swaps changes in a property index, for an interest rate. Such swaps are afforded a special tax treatment by CTA09/S650, with the ‘capital’ element being split from the ‘income’ element.

CTA09/S650 applies to derivative contracts with all the following characteristics:

  • Condition A: The contract must be a contract for differences.
  • Condition B: The contract must designate one or more indices.
  • Condition C: At least one of the indices (the ‘capital value index’) must be an index of changes in the value of land. If, for example, the contract designates an IPD (Investment Property Databank) total return index, this will not meet the condition. But the condition will be met if the contract designates, separately, an IPD capital value index and an IPD rental return index. (The computational adjustments then apply only to the capital value index.)
  • Condition D: The underlying subject matter must also include interest rates.

S650 applies to contracts entered into on or after 1 August 2004 in an accounting period ending on or after 17 September 2004. For accounting periods beginning on or after 1 January 2005, two additional conditions must be satisfied:

  • Condition E: The company must not be party to the contract for the purposes of its trade at any time in the accounting period (unless the company is a mutual trading company, or the contract is held for the purposes of life assurance business). If a property-based total return swap is held for trade purposes, all credits and debits will be brought into account as trading income or expenses under the normal S573 rule.
  • Condition F: 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).

For accounting periods beginning on or after 5 December 2012, a further two conditions must be satisfied. For the purposes of these two conditions, an accounting period is deemed to begin on 5 December 2012.

  • Condition G: No two or more of the parties to the derivative contract are connected persons.
  • Condition H: The parties must not have entered into the contract with the main purpose, or one of the main purposes, of obtaining a tax advantage. Tax advantage is defined in section 1139 CTA 2010.

An example of a contract which would not qualify under Condition H would be an arrangement under which one party was only able to make a capital gain from a contract, and did not have exposure to downwards movements in property prices. However, the Condition is not limited to those arrangements.

Where all of these conditions are satisfied, the contract is bifurcated for tax purposes into a ‘capital leg’ and an ‘income leg’ - see CFM55110.