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HMRC internal manual

Savings and Investment Manual

HM Revenue & Customs
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Disguised interest: examples

The legislation in ITTOIA05/PT/CH2A applies to any arrangements that generate a return that is not interest in legal form but which is economically equivalent to interest as defined in ITTOIA05/S381A (SAIM2740). The following are examples of arrangements that will clearly fall with the definition.

Guaranteed returns from derivative contracts

Derivative contracts may, either singly or in combination, produce a guaranteed return that is equivalent to the return that would be obtained from investing money in an interest-bearing arrangement. A ‘box option’ scheme is an example of such an arrangement (SAIM7030). Such arrangements formerly fell within ITTOIA05/PT4/CH12 (SAIM7000).

Manufactured interest and price differences on sale and repurchase agreements (repos)

The rules on manufactured interest and price differences on sale and repurchase agreements are explained in detail in the Corporate Finance Manual atCFM46000 and CFM74000. Such arrangements are rarely entered into by persons within the charge to income tax, but where they are, returns received will fall within the rules in ITTOIA05/PT4/CH2A.

Currency movements

An investor may receive a return from holding deposits in more than one currency, seeking to take advantage of movements in exchange rates to generate a return. The arrangements may require the investor to enter into options involving the receipt or payment of amounts in the event of the spot rate being above or below a specified level. The return the investor actually receives may be described, for example, as a combination of a ‘money market rate’ (say 0.5% p.a.) plus an option premium (say 4.5%), giving an overall yield of 5%. This return will fall within the disguised interest provisions.