CFM55110 - Derivative contracts: chargeable gains on derivatives: property based total return swaps: tax treatment

Tax treatment of property-based total return swaps

Where all of the conditions at CFM55100 are met, part of the debits or credits computed under the normal derivative contracts rules is brought into account under CTA09/S641 as a chargeable gain or allowable loss. Under S659(4), this amount is given by the formula:

S641 credit or debit = R% x N,

where N is the notional principal amount of the contract, and R% is the percentage change (if any) in the capital value index for the relevant period.

‘Relevant period’ means the accounting period if the company was party to the contract for the whole of the period, or - if the company only held the contract for part of the accounting period - the period in question (S659(5)).

Where it is not possible to determine precisely the percentage change for the relevant period, for example, if a swap based on an annual index is disposed of part-way through the year, a published estimate or reasonable interpolation of the index value can be used.

The remaining gain or loss on the contract for the period is brought into account as a non-trading credit or debit in the normal way.

The aim of S650 is to segregate ‘property related’ amounts payable or receivable under a property based total return swap from ‘interest related’ amounts, giving capital treatment to the former and income treatment to the latter. It is not a precision instrument, and the segregation will not be exact in many cases, for example, where a lump sum payment is made or received on disposal or early termination of a contract.

In general, the ‘capital’ and ‘income’ amounts for tax purposes will not reflect accounts entries, and it will be necessary to dissect credits or debits shown by the accounts - see example at CFM55120.