Property Derivatives: IR Document
The model is intended to offer a comprehensive regime for all derivative financial instruments held by companies, including life assurance companies, based on the derivative contracts regime introduced in FA 2002. That regime went some way to achieving this, but did not deal with those instruments whose values derived, in particular, from property or shares. The regime was designed, following extensive consultation with derivatives experts, to address a wide and varied range of derivatives including instruments that might be marketed in future. The proposed new model continues and enhances this approach.
The key features of the model are:
- All derivative contracts held by companies are brought within a single regime which recognises the full economic profits, gains and losses on such contracts; section 143 Taxation of Capital Gains Act 1992 will no longer apply to such derivative contracts held by companies;
- The primary test of whether a contract is a "derivative contract" for this purpose is whether it is recognised as a derivative financial instrument under generally accepted accountancy principles;
- The amounts taxed or relieved in any accounting period follow the amounts recognised in the accounts for the same period, including certain contracts (see next bullet) whose profits and losses, are treated as capital gains or losses under the new regime;
- For futures and options whose value is derived from an asset which itself would be subject to tax on chargeable gains, the regime will treat profits and losses as chargeable gains and allowable losses (no indexation allowance would be available);
- For all swap contracts, all profits and losses will be within the derivative contracts rules;
- It allows the existing derivative contracts regime to be simplified;
- The tax treatment of normal sales and purchases of land or shares, including options forming part of such transactions is unaffected unless, exceptionally, the company chooses to account for the contract as a derivative, or the transaction is part of arrangements to provide a return similar to interest on a loan or deposit.
The proposed model offers a deregulatory approach to a framework within which markets can develop innovative contracts unhindered by tax uncertainties. Views on the compliance implications of such an approach are welcomed.