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HMRC internal manual

Savings and Investment Manual

Disguised interest: examples: returns based on an index of equity or commodity prices

Some structured financial products, often marketed only to the sophisticated investor, take the form of securities, notes, certificates and similar documents, on which the return is related to the movement of an index, usually of the market price of equities or commodities. The key issue in such cases is not the label by which the product is described, or the type of reference asset (if any) underlying the instrument, but the nature of the return the arrangement provides.

Sometimes such instruments provide a genuine exposure to the risks and rewards of an underlying asset or commodity. Alternatively, there may be no direct connection between the movement of the index and the gain or loss of the investor, but the product may provide a capped return from the performance of the reference assets, in exchange for limitation on the downside risk to the investor’s capital.

For example, the return may be a fixed percentage if an index rises, with no return if the index falls and a risk of loss of some or all of the capital if the index falls below a certain level.

Whether or not each such product is within the disguised interest provisions will depend on the practical likelihood of the specified movements in the index actually occurring. In most cases this can only be determined by examining the component features of the index.