As originally enacted, ICTA88/SCH5AA applied only to disposals
of futures and options. It was therefore possible to avoid its
operation by using options that were exercised, or financial or
commodity futures that resulted in the delivery of the underlying
asset, since these events are not treated by TCGA 1992 as
disposals. This was addressed in FA 1998, when a new rule was
introduced. It applies to futures that run to delivery, or options
that are exercised, after 5 February 1998. The rule is now in
ITTOIA05/S564 and S565.
ITTOIA05/S564 applies where there are two or more related
transactions (as defined in section 566), and two conditions are
met.
Condition A is that one of those transactions is the creation
or acquisition of a future or option (for example, buying a futures
contract or paying a premium for an option).
Condition B is that one or more of the other transactions is
running a future to delivery, or exercising an option, where the
transaction does not constitute a disposal of the future or option.
Where these conditions are fulfilled, section 564 deems a
disposal to have taken place immediately before the future has run
to delivery, or the option has been exercised. If the future or
option has a market value (in other words, it represents an asset
of the person holding it), the disposal consideration is taken to
be the market value. If, on the other hand, the derivative
represents a liability to the holder, the disposal consideration is
deemed to be nil. Furthermore, the holder is treated as incurring
costs equal to what he or she would have to pay to get an
arm’s length party to assume the liability.
In applying Conditions A and B, TCGA92/S144 (2) and (3) are
disregarded. This is because under these two subsections of
TCGA92/S144 (which is applicable as a result of section 562) the
grant and the exercise of an option are treated as a single
transaction (to enable the premium to be set against the disposal
proceeds). But, in order for section 564 to apply, there must be
two related transactions, the creation of the future or option and
its running to completion or being exercised, so those two
transactions must not be taken to be a single transaction.
ITTOIA05/S565 provides interpretation of section 564. In
particular it defines ‘party’ in relation to the future
or option in terms of rights, entitlements, obligations and
liabilities, ensuring that both ‘grantors’ and
‘grantees’ of futures and options fall within the
definition.
SAIM7110 gives an example of the
operation of ITTOIA05/S564.
