Non-residents trading in the UK: through UK investment managers, brokers or Lloyd’s agents: investment managers: "investment transaction": transactions in relevant contracts
What are “relevant contracts”?
Regulation 5 of The Investment Manager (Specified Transactions) Regulations 2009 admits transactions in relevant contracts. In regulation 5 a “relevant contract” is:
- An option;
- A future; or
- A contract for differences.
Regulation 5 is designed to encompass transactions in a very wide range of derivative contracts. The definitions are widely-drawn and, importantly, there is no requirement for the option, future or contract for differences to be accounted for as a derivative financial instrument in order to be a relevant contract. An option includes, but is not limited to, the type of instrument described in regulation 5(3); commonly called “warrants”.
Where a contract provides for cash settlement only and does not provide for the delivery of any property, it will not be an option or a future for the purposes of regulation 5; but such cash-settled derivative contracts will generally be contracts for differences within the meaning of regulation 5(9).
Regulation 5(7)(c) provides that an option or future will not be a relevant contract where physical delivery of the underlying property takes place and that property is not of a type itself specified in the Regulations. This excludes transactions in contracts which result in physical delivery of property other than stocks and shares, relevant contracts, loan relationships, units in collective investment schemes, securities, currency or carbon emission trading products. Regulation 5(7)(c) prevents an option under which a physical commodity such as oil or precious metals is delivered from being a relevant contract.
Contracts which provide for, but do not result in, physical delivery are not excluded (whatever the underlying subject matter) and neither are contracts which result in the delivery of property, transactions in which are themselves specified in the Regulations. For example, a transaction in an option which has a physical commodity, such as wheat, as the underlying property is not prevented from being a relevant contract by regulation 5(7)(c), provided the option is not settled by physical delivery of the commodity. A transaction in an option which is settled by the delivery of shares, for example, will be a relevant contract, because transactions in shares are themselves specified in the Regulations.
Regulation 5(10)(c) excludes a contract of insurance from being a contract for differences. For the purposes of regulation 5, a contract of insurance does not include a credit default swap (CDS). Transactions in CDSs will be within regulation 5(1) as transactions in contracts for differences, which are relevant contracts by virtue of regulation 5(2).
Regulation 5(13) prevents an option, future or contract for differences from being a relevant contract where the contract relates to land. But this exclusion does not apply to contracts the underlying subject matter of which is an index, provided the index is publicly accessible, comprised of a significant number of properties and not maintained by the non-resident person, the investment manager, or a person or persons connected with either. Connection is determined in accordance with ITA07/S993 and S994 (for income tax) and CTA10/S1122 (for corporation tax).
The conditions in regulation 5(13)(a)-(c) are designed to exclude arrangements that may be structured in such a way as to replicate or approximate the returns from specified or identifiable holdings of land. Such arrangements would be contrary to the general prohibition on transactions in land and contracts relating to land. In order to meet the “significant number of properties” condition, an index must be sufficiently broadly based to ensure that a contract based upon it is not tailored around specific real estate holdings. Publicly accessible indices providing regional and sectoral data based upon valuations of a wide and changing range of institutional investment portfolios will, for example, meet this requirement.
The Transfer Pricing Team at Business International can advise on the admissibility of property indices in particular cases of doubt or difficulty.