Finance Act 1998

Futures and optionsU.K.

99 Extension of provisions relating to guaranteed returns.U.K.

(1)In Schedule 5AA to the Taxes Act 1988 (guaranteed returns on transactions in futures and options), the following paragraph shall be inserted after paragraph 4—

4A(1)This paragraph applies where for the purposes of this Schedule—

(a)there are or, apart from section 144(2) or (3) of the 1992 Act, would be two or more related transactions;

(b)one of those transactions is or would be the creation or acquisition (by the making or receiving of a grant or otherwise) of a future or option;

(c)the other transaction, or one of the other transactions, is or would be the running of the future to delivery or the exercise of the option; and

(d)the transaction mentioned in paragraph (c) above is not treated for those purposes as a disposal of a future or option.

(2)This Schedule shall have effect in relation to the parties to the future or option as if the transaction specified in sub-paragraph (3) below—

(a)were a transaction for which the scheme or arrangements by reference to which the transactions are related transactions provided; and

(b)were a transaction which in fact takes place at the time (“the relevant time") immediately before the future runs to delivery or, as the case may be, the option is exercised.

(3)That transaction is a disposal of the future or option which—

(a)in the case of a person whose rights and entitlements under the future or option have a market value at the relevant time, consists in a disposal for a consideration equal to that market value; and

(b)in the case of any other party to the future or option, consists in a disposal which—

(i)is made for a nil consideration; and

(ii)involves that person in incurring costs equal to the amount specified in sub-paragraph (4) below.

(4)That amount is the amount which that party to the future or option might reasonably have been expected to pay, in a transaction at arm’s length entered into at the relevant time, for the release of his obligations and liabilities under the future or option.

(5)Where, in a case in which a transaction is deemed to take place by virtue of sub-paragraph (2)(b) above (“the deemed transaction")—

(a)any profits or gains arising from the deemed transaction are chargeable to tax under Case VI of Schedule D in accordance with paragraph 1(1) above, or

(b)any loss arising in the deemed transaction is brought into account for the purposes of section 392 or 396 in accordance with paragraph 1(5) above,

amounts taken into account or allowable as deductions in computing those profits or gains, or that loss, shall not be excluded by virtue of section 37 or 39 of the 1992 Act (exclusion of amounts taken into account or allowable for the purposes of the taxation of income and profits) from any computation made for the purposes of that Act, but paragraph 1(6) above shall be given effect to in relation to the 1992 Act in accordance with sub-paragraphs (6) to (10) below.

(6)Where there are profits or gains arising to any person (“the taxpayer") from the deemed transaction, an increase equal to the amount of those profits or gains shall be made in the amount that would otherwise be taken for the purposes of the 1992 Act to be—

(a)the amount of the consideration for the acquisition of any asset acquired by the taxpayer by means of the future running to delivery or, as the case may be, by the exercise of the option; or

(b)the amount of the consideration for the acquisition by him of any asset disposed of by him by means of the future running to delivery or, as the case may be, in consequence of the exercise of the option;

but any increase made by virtue of paragraph (b) above in the amount of any consideration shall be disregarded in computing the amount of any indexation allowance.

(7)Where there is a loss for any person (“the taxpayer") in the deemed transaction—

(a)a reduction equal to the smaller of the amount of the loss and the amount to be reduced shall be made in the amount that would otherwise be taken for the purposes of the 1992 Act to be the amount of the consideration mentioned in sub-paragraph (6)(a) or (b) above; and

(b)the amount (if any) by which the amount of the loss exceeds the amount to be reduced shall be deemed to be a chargeable gain accruing to the taxpayer on the occasion specified in sub-paragraph (8) below.

(8)That occasion is—

(a)in a case where the consideration mentioned in paragraph (a) of sub-paragraph (6) above has been reduced to nil, the first occasion after the acquisition mentioned in that paragraph when there is a disposal of the asset in question; and

(b)in a case where it is the consideration mentioned in sub-paragraph (6)(b) above that has been reduced to nil, the occasion of the disposal made by the taxpayer by means of the future running to delivery or, as the case may be, in consequence of the exercise of the option.

(9)For the purposes of sub-paragraphs (6) and (7) above, where in any case there is a deemed disposal of an option by the person who granted it, any determination—

(a)of the profits arising to the grantor of the option from that disposal, or

(b)of the losses for the grantor in that disposal,

shall be made as if that disposal and the disposal by which the option was granted were a single transaction.

(10)In sub-paragraph (8) above—

(a)the reference in paragraph (a) to a disposal of the asset in question includes a reference to anything that would be such a disposal but for the provisions of section 116(10) or 127 of the 1992 Act; and

(b)the references in each of paragraphs (a) and (b) to a disposal include references to a disposal which, in accordance with the 1992 Act, would (apart from sub-paragraph (7)(b) above) be a disposal on which neither a gain nor a loss accrues.

(11)In this paragraph—

• “future” and “option” have the same meanings as in paragraph 4 above;

• “market value” has the same meaning as in the 1992 Act;

• “party”, in relation to a future or option, means one of the persons who has any right or entitlement comprised in or arising under the future or option or who is subject to any obligation or liability so comprised or arising;

and references in this paragraph to a future running to delivery are references to the discharge by performance of the obligations owed under the commodity or financial futures contract in question to the party to the future whose rights are in relation to its underlying subject matter.

(12)Sub-paragraph (3) of paragraph 3 above applies for the purposes of sub-paragraph (11) above as it applies for the purposes of that paragraph.”

(2)In paragraph 9 of that Schedule (insurance companies), for the words from the beginning to “this Schedule" there shall be substituted—

“9(1)This paragraph applies where—

(a)any determination falls to be made under section 432A of the category of business to which any income or losses is or are referable; and

(b)that income or those losses would all be chargeable or relievable by virtue of this Schedule but for the exemptions from tax and exclusions from the provisions of this Schedule that are applicable in respect of the category of business to which it or they are determined to be referable.

(2)Section 432A shall have effect”.

(3)In that paragraph, after the sub-paragraph (2) created by virtue of subsection (2) above there shall be inserted the following sub-paragraphs—

“(3)Subject to sub-paragraphs (4) and (5) below, paragraph 4A above shall have effect as if the references in sub-paragraph (5) of that paragraph to—

(a)profits or gains arising from the deemed transaction that are chargeable to tax under Case VI of Schedule D in accordance with paragraph 1(1) above, or

(b)any loss arising in the deemed transaction that is brought into account for the purposes of section 392 or 396 in accordance with paragraph 1(5) above,

were references to all the income or losses in relation to which the determination mentioned in sub-paragraph (1) above falls to be made.

(4)Sub-paragraph (6) of paragraph 4A above shall not apply in relation to the amount of the consideration for the acquisition of any asset acquired by the taxpayer by means of the future running to delivery or, as the case may be, by the exercise of the option if—

(a)immediately before the time of the deemed transaction, the future or option is an asset within one of the categories set out in section 440(4); and

(b)immediately after its acquisition, the asset acquired is within another of those categories.

(5)Sub-paragraph (6) of paragraph 4A above shall not apply in relation to the amount of the consideration for the acquisition of any asset disposed of by the taxpayer by means of the future running to delivery or, as the case may be, by the exercise of the option if—

(a)immediately before the time of the deemed transaction, the future or option is an asset within one of the categories set out in section 440(4); and

(b)immediately before its disposal, the asset disposed of is within another of those categories.

(6)Where any future or option would not fall (apart from this sub-paragraph) to be treated as an asset for the purposes of section 440, any question for the purposes of this paragraph whether it is an asset within any of the categories set out in subsection (4) of that section shall be determined as if it were an asset.

(7)Expressions used in this paragraph and in paragraph 4A above have the same meanings in this paragraph as in that paragraph.”

(4)In paragraph 4(6) of that Schedule, in the definition of “option", after paragraph (b) there shall be inserted— “ and includes any liability or entitlement under an option. ”

(5)This section applies where the transaction consisting in the future running to delivery or the exercise of the option takes place on or after 6th February 1998.