SAIM7010 - Artificial transactions in futures and options: introduction
For individuals and trusts, profits from transactions in derivative contracts are not generally taxable as income unless they are profits of a trade. BIM65701 gives guidance on what constitutes derivatives trading by individuals, and see the Corporate Finance Manual (CFM11000 onwards SAIM20000) for more general guidance on derivative contracts.
Profits from transactions in derivatives by individuals are not taxable as savings and investment income. Nor are losses relievable (see also ITA07/S81 for the denial of sideways loss relief on dealings in commodity futures in partnership with a company). And ITTOIA05/S779 ensures that no liability arises under Chapter 8 of Part 5 of ITTOIA05 (miscellaneous income - income not otherwise charged) on commodity or financial futures or qualifying options. Instead profits from futures and options arising to an individual or trust, other than as part of a trade, are subject to the capital gains rules. See TCGA92/S143 and CG55400 onwards.
Guaranteed returns
There is however an exception for disposals of in futures and options that are disposals involving a ‘guaranteed return’. Contracts such as futures and options can be used by individuals and trusts to generate a guaranteed return which is in economic terms equivalent to interest but which is received as capital gains. Less tax may be payable where those gains are covered by capital losses, or by capital gains tax reliefs or exemptions. SAIM7030 gives an example of how such a return can be achieved.
Such returns are taxable as savings and investment income under Chapter 12 of Part 4 of ITTOIA05. This legislation was originally introduced by FA97 as ICTA88/SCH5AA. This provided for a Case VI charge on profits realised on or after 5 March 1997 from the futures or options concerned. The rules were extended in FA98 (SAIM7090).
For companies, with effect from accounting periods beginning on or after 1 October 2002, the provisions were superseded by the derivatives contracts regime (see CFM13405). The legislation at Schedule 5AA continued to apply to individuals and trusts, and has now been rewritten as part of Tax Law Rewrite. The charge to tax is now on savings and investment income under Chapter 12 of Part 4 of ITTOIA05, in sections 555 to 569.
Reports
SAIM7030 contains an example of an artificial transaction in futures or options. Since ICTA88/SCH5AA became law, schemes of this nature have become much less common. If, however, you come across such a scheme, which seems designed to ensure that a profit, which is in substance interest, appears as a capital gain, you should seek advice from CTIAA (Finance and Insurance Team) or Anti-Avoidance Group.
