CFM16750 - Taxing loan relationships: share-linked securities: taxing the holder

This guidance applies to periods of account beginning on or after 1 January 2005

Holder of a share-linked security: taxing the derivative

See CFM16605 to CFM16650 for an overview of the taxation of “hybrid” securities. CFM16750 to 16775 explain the detailed rules that apply to the holder of a share-linked security.

Accounting treatment

Where a company holding an asset-linked security accounts separately for the derivative (the “contract for differences”), it must recognise any changes in its fair value at each balance sheet date. Accounting credits and debits may therefore arise in each period of account. See the example at CFM16630a.

Tax treatment

FA96/S94A provides for the derivative to be taxed under FA02/SCH26. Under the normal operation of FA02/SCH26, the debits and credits arising from a contract for differences would be treated as income.

However subject to certain conditions these credits and debits, found in accordance with SCH26/PARA15, may be taxed instead as chargeable gains, or allowable losses, in accordance with FA02/SCH26/PARA45A. The conditions are at FA02/SCH26/PARA45F. They are similar, but not identical to, those formerly at FA96/S93, 93A and 93B.

Where the security does not meet all these conditions, the credits and debits arising from the derivative are taxed as income in the usual way. As with FA96/S93, the conditions are restrictive. Many, if not most, commercial securities where the return is linked to shares, or to a share index, will not qualify and will be taxed as normal loan relationships.