Finance Act 1997

Section 80.

SCHEDULE 11Futures and options: taxation of guaranteed returns

Schedule to be inserted as Schedule 5AA to the Taxes Act 1988

“SCHEDULE 5AAGuaranteed returns on transactions in futures and options

Charge to tax etc.

1(1)Subject to sub-paragraph (2) below, profits and gains arising from a transaction to which this Schedule applies (including those which, apart from this sub-paragraph, would be taken to be of a capital nature) shall be treated, when realised—

(a)as income of the person by whom they are realised; and

(b)as chargeable to tax under Case VI of Schedule D for the chargeable period in which they are realised.

(2)Sub-paragraph (1) above does not apply to—

(a)so much of any profits or gains arising to a person from a transaction as are charged to tax in his case under Case I or V of Schedule D;

(b)any profits or gains arising to a company which is a qualifying company from a transaction which, as regards that company, is or is deemed to be a qualifying contract; or

(c)any profits or gains arising to an authorised unit trust (within the meaning of section 468).

(3)In sub-paragraph (2) above—

• “qualifying company” means a qualifying company for the purposes of Chapter II of Part IV of the [1994 c. 9.] Finance Act 1994 (interest rate, currency and debt contracts); and

• “qualifying contract” means a qualifying contract for those purposes.

(4)For the purposes of this Schedule the profits and gains arising from a transaction to which this Schedule applies are to be taken to be realised at the time when the disposal comprised in the transaction takes place.

(5)For the purposes of sections 392 and 396 any loss in a transaction to which this Schedule applies is to be taken to be sustained at the time when, in accordance with sub-paragraph (4) above, any profits or gains arising from that transaction would have been realised.

(6)Subject to sub-paragraph (7) below, the following, namely—

(a)profits and gains to which sub-paragraph (1) above applies, and

(b)losses in transactions the profits and gains from which (if there were any) would be profits and gains to which that sub-paragraph applies,

shall not be brought into account for the purposes of income tax, corporation tax or capital gains tax except by virtue of this Schedule and, in the case of losses, section 392 or 396.

(7)Nothing in sub-paragraph (6) above shall prevent any amount from being brought into account in accordance with section 83 of the [1989 c. 26.] Finance Act 1989 (receipts to be brought into account in any Case I computation made in respect of life insurance).

Transactions to which Schedule applies

2(1)This Schedule applies to a transaction if—

(a)it is a disposal of futures or options;

(b)it is one of two or more related transactions designed to produce a guaranteed return; and

(c)the guaranteed return comprises the return from that disposal or from a number of disposals of futures or options, of which that disposal is one, taken together.

(2)For the purposes of this Schedule two or more related transactions are transactions designed to produce a guaranteed return if, taking the transactions together, it would be reasonable to assume, from either or both of—

(a)the likely effect of the transactions, and

(b)the circumstances in which the transactions are entered into, or in which any of them is entered into,

that their main purpose, or one of their main purposes, is or was the production of a guaranteed return from one or more disposals of futures or options.

Production of guaranteed return

3(1)For the purposes of this Schedule a guaranteed return is produced from one or more disposals of futures or options wherever (taking all the disposals together where there is more than one) risks from fluctuations in the underlying subject matter are so eliminated or reduced as to produce a return from the disposal or disposals—

(a)the amount of which is not, to any significant extent, attributable (otherwise than incidentally) to any such fluctuations; and

(b)which equates, in substance, to the return on an investment of money at interest.

(2)For the purposes of sub-paragraph (1) above the cases where risks from fluctuations in the underlying subject matter are eliminated or reduced shall be deemed to include any case where the main reason, or one of the main reasons, for the choice of that subject matter is—

(a)that there appears to be no risk that it will fluctuate; or

(b)that the risk that it will fluctuate appears to be insignificant.

(3)In this paragraph the references, in relation to a disposal of futures or options, to the underlying subject matter are references to or to the value of the commodities, currencies, shares, stock or securities, interest rates, indices or other matters to which, or to the value of which, those futures or options are referable.

Disposals of futures or options

4(1)For the purposes of this Schedule a disposal is a disposal of futures or options if it consists in—

(a)the disposal of one or more futures;

(b)the disposal of one or more options; or

(c)the disposal of one or more futures together with one or more options.

(2)Subject to sub-paragraph (4) below, any question for the purposes of this Schedule as to whether there is a disposal falling within sub-paragraph (1)(a) to (c) above, or as to when such a disposal is made, shall be determined, on the assumptions specified in sub-paragraph (3) below, in accordance with—

(a)section 143(5) and (6), 144 and 144A of the 1992 Act (closing out and settlement of futures contracts and rules in relation to options); and

(b)the other provisions having effect for determining for the purposes of that Act whether or when an asset is disposed of;

and references in this Schedule to entering into a transaction are references, in relation to a transaction consisting in a disposal, to the making of the disposal.

(3)Those assumptions are—

(a)that all futures are assets for the purposes of the 1992 Act;

(b)that the words “in the course of dealing in commodity or financial futures” are omitted in each place where they occur in section 143(5) and (6) of that Act; and

(c)that any reference in that Act to a financial option within the meaning given by section 144(8) of that Act is a reference to any option that is not a traded option.

(4)Subject to sub-paragraph (5) below, where—

(a)one of a number of related transactions designed to produce a guaranteed return is the grant of an option,

(b)at least one of the other transactions is a transaction entered into after the grant of the option, and

(c)the transaction or transactions entered into after the grant of the option is or include a disposal which is not itself the grant of an option,

the disposal consisting in the grant of the option shall be deemed for the purposes of this Schedule to be a disposal made on the first occasion after the grant of the option when one of the other transactions which is a disposal but is not itself the grant of an option is entered into.

(5)Nothing in sub-paragraph (4) above affects so much of sub-paragraph (2) above as (by applying section 144(2) or 144A(2) of the 1992 Act (cases where options are exercised))—

(a)requires the grant of an option and the transaction entered into by the grantor in fulfilment of his obligations under that option to be treated for the purposes of this Schedule as a single transaction; or

(b)determines the time at which such a single transaction is to be treated for the purposes of this Schedule as entered into.

(6)In this paragraph—

• “future” means outstanding rights and obligations under a commodity or financial futures contract;

• “option” means a traded option or an option which is not a traded option but is an option relating to—

  (a)

  currency, shares, stock, securities or an interest rate; or

  (b)

  rights under a commodity or financial futures contract;

• “traded option” has the meaning given for the purposes of subsection (4) of section 144 of the 1992 Act by subsection (8) of that section.

The return from one or more disposals

5(1)In this Schedule references to the return from one or more disposals are references to the return on investment represented either—

(a)by the total net profits and gains arising from the disposal or disposals; or

(b)by all but an insignificant part of those net profits and gains.

(2)For the purposes of the references in sub-paragraph (1) above to the total net profits and gains from any two or more disposals, it shall be assumed that profits and gains realised, and losses sustained, by persons who are associated with each other are all realised or sustained by the same person.

(3)For the purposes of sub-paragraph (2) above persons are associated with each other in relation to any two or more disposals made in pursuance of the same scheme or arrangements if—

(a)each of those persons shares or is to share, to an extent determined for the purposes of or in accordance with the scheme or arrangements, in the net return represented by the aggregate of all the profits, gains and losses realised or sustained on those disposals;

(b)those persons are associated companies at the time when the last of those disposals is made; or

(c)those persons have been associated companies at an earlier time falling after the first occasion on which a transaction was entered into in pursuance of the scheme or arrangements.

(4)In this paragraph—

• “associated company” shall be construed in accordance with section 416; and

• “scheme or arrangements” shall be construed in accordance with paragraph 6(4) below.

Related transactions

6(1)For the purposes of this Schedule two or more transactions are related if all of them are entered into in pursuance of the same scheme or arrangements.

(2)Nothing in this Schedule shall be construed as preventing transactions with different parties, or transactions with parties different from the parties to the scheme or arrangements in pursuance of which they are entered into, from being related transactions.

(3)For the purposes of this paragraph the cases in which any two or more transactions are to be taken to be entered into in pursuance of the same scheme or arrangements shall include any case in which it would be reasonable to assume, from either or both of—

(a)the likely effect of the transactions, and

(b)the circumstances in which the transactions are entered into, or in which any of them is entered into,

that neither of them or, as the case may be, none of them would have been entered into independently of the other or others.

(4)In this paragraph “scheme or arrangements” includes schemes, arrangements and understandings of any kind, whether or not legally enforceable.

Special rule for trusts

7(1)Where any profits or gains are treated, in accordance with paragraph 1 above, as income arising to trustees for any year of assessment, the relevant part of that income shall be treated for the purposes of the Tax Acts as if it were income to which section 686 applies (income taxable at the rate applicable to trusts).

(2)In sub-paragraph (1) above the reference to the relevant part of any income is a reference to so much (if any) of that income as—

(a)does not fall to be treated for the purposes of the Income Tax Acts as income of a settlor;

(b)is not income arising under a trust established for charitable purposes; and

(c)is not income from investments, deposits or other property held for any such purposes as are mentioned in sub-paragraph (i) or (ii) of section 686(2)(c) (property held for pension purposes).

(3)Subsection (6) of section 686 (meaning of “trustees” etc.) shall apply for the purposes of this paragraph as it applies for the purposes of that section.

Transfer of assets abroad

8For the purpose of determining whether an individual ordinarily resident in the United Kingdom has a liability for income tax in respect of any profit or gain which—

(a)is realised by a person resident or domiciled outside the United Kingdom, and

(b)arises from a transaction to which this Schedule applies,

sections 739 and 740 (transfer of assets abroad) shall have effect as if that profit or gain, when realised, constituted income becoming payable to the person resident or domiciled outside the United Kingdom.

Apportionment in the case of insurance companies

9Section 432A (apportionment of insurance companies' income) shall have effect in the case of income and losses chargeable or relievable by virtue of this Schedule as if (where that would not otherwise be the case)—

(a)any such income were for the purposes of that section a gain accruing on the disposal of an asset; and

(b)any such loss were for the purposes of that section a loss accruing on the disposal of an asset.”