Income Tax (Trading and Other Income) Bill

House of Commons

Session 2004 - 05
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Income Tax (Trading and Other Income) Bill

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 12 — Disposals of futures and options involving guaranteed returns
246

(2)
In this Chapter “option” means—
(a)
an option relating to—
(i)
currency, shares, stock, securities or an interest rate, or
(ii)
rights under a commodity or financial futures contract, or
(b)
any other option which at the time of the disposal in question is listed
5
on a recognised stock exchange or recognised futures exchange,

and includes any liability or entitlement under an option within paragraph (a)
or (b).
(3)
In this Act “recognised futures exchange” means the London International
Financial Futures Exchange and any other futures exchange which is for the
10
time being designated for the purposes of TCGA 1992 by order made by the
Board of Inland Revenue under section 288(6) of that Act.
When disposals involve guaranteed returns
559
When disposals involve guaranteed returns
(1)
For the purposes of this Chapter, a disposal of a future or option involves
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guaranteed returns if conditions A to C are met.
(2)
Condition A is that the disposal is one of two or more related transactions (see
section 566).
(3)
Condition B is that those transactions are designed to produce a guaranteed
return (see subsection (5)).
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(4)
Condition C is that the guaranteed return comprises—
(a)
the return from the disposal (see section 561), or
(b)
the return from a number of disposals of futures or options, of which
the disposal is one, taken together.
(5)
For the purposes of this Chapter, two or more related transactions are
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transactions designed to produce a guaranteed return if, taking them together,
it would be reasonable to assume from one or more of the matters specified in
subsection (6) that—
(a)
the main purpose of the transactions is or was the production of a
guaranteed return from one or more disposals of futures or options (see
30
section 560), or
(b)
that is or was one of their main purposes.
(6)
Those matters are—
(a)
the likely effect of the transactions,
(b)
the circumstances in which the transactions are entered into, and
35
(c)
the circumstances in which any one of the transactions is entered into.
(7)
In the case of a transaction which is a disposal, the references in subsection (6)
to entering into the transaction are references to making the disposal.
560
Production of guaranteed returns
(1)
For the purposes of this Chapter, a guaranteed return is produced from a
40
disposal of a future or option if risks from fluctuations in the underlying
subject matter are so eliminated or reduced as to produce a return from the
disposal that meets conditions A and B.

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 12 — Disposals of futures and options involving guaranteed returns
247

(2)
If there is more than one such disposal, a guaranteed return is produced from
them if, taking them together, such risks are so eliminated or reduced.
(3)
Condition A is that the amount of the return is not to any significant extent
attributable (otherwise than incidentally) to any such fluctuations.
(4)
Condition B is that the return equates, in substance, to the return on an
5
investment of money at interest.
(5)
For the purposes of subsections (1) and (2), the cases where risks from
fluctuations in the underlying subject matter are eliminated or reduced include
any case where the main reason or one of the main reasons for the choice of that
subject matter is—
10
(a)
that there appears to be no risk that it will fluctuate, or
(b)
that the risk that it will do so appears insignificant.
(6)
In this section the references, in relation to a disposal of a future or option, to
the underlying subject matter are references to, or to the value of, the
commodities, currencies, shares, stock or securities, interest rates, indices or
15
other matters—
(a)
to which the future or option is referable, or
(b)
to the value of which it is referable.
561
The return from one or more disposals
(1)
In this Chapter, references to the return from one or more disposals are
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references to the return on investment represented by—
(a)
the total net profits and gains arising from the disposal or disposals, or
(b)
all but an insignificant part of those net profits and gains.
(2)
For the purposes of subsection (1), if there are two or more disposals, it is to be
assumed that profits and gains realised, and losses made, by persons who are
25
associated with each other are all realised or made by the same person.
(3)
For the purposes of subsection (2), persons are associated with each other in
relation to any two or more disposals if conditions A to C are met.
(4)
Condition A is that the disposals are made in pursuance of the same scheme or
arrangements.
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(5)
Condition B is that each of the persons shares or is to share in the net return
represented by the total of all the profits, gains and losses realised or made on
the disposals.
(6)
Condition C is that the extent of the persons’ shares is determined for the
purposes of, or in accordance with, the scheme or arrangements.
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(7)
For the purposes of this section—
(a)
“scheme or arrangements” includes understandings of any kind, and
(b)
it does not matter whether any scheme or arrangements are legally
enforceable.

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 12 — Disposals of futures and options involving guaranteed returns
248

When disposals of futures and options occur
562
When disposals of futures and options occur: general
(1)
Any question whether there is a disposal for the purposes of this Chapter, or
as to when such a disposal is made, is to be determined—
(a)
in accordance with sections 143(5) and (6), 144 and 144A of TCGA 1992
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(closing out and settlement of futures contracts and rules in relation to
options),
(b)
otherwise in accordance with the provisions having effect for
determining for the purposes of TCGA 1992 whether or when an asset
has been disposed of, and
10
(c)
on assumptions A to C.
(2)
Assumption A is that all futures are assets for the purposes of TCGA 1992.
(3)
Assumption B is that the words “in the course of dealing in commodity or
financial futures” are omitted from section 143(5) and (6) of TCGA 1992 in each
place where they occur.
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(4)
Assumption C is that any reference in TCGA 1992 to a financial option within
the meaning given by section 144(8) of that Act is a reference to any option that
at the time of the disposal in question is not listed on a recognised stock
exchange or recognised futures exchange (regardless of whether the conditions
in section 144(8)(c)(i) to (iv) of that Act are met).
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(5)
Subsection (1) is subject to section 563 (timing of certain grants of options
where related disposals occur later), and see also section 564 (deemed disposal
where futures run to delivery or options are exercised).
563
Timing of certain grants of options where related disposals occur later
(1)
For the purpose of this Chapter, a disposal consisting in the grant of an option
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(“the grant”) is treated as taking place at a later time than it would be taken as
occurring under section 562 if conditions A to C are met.
(2)
Condition A is that the grant is one of a number of related transactions
designed to produce a guaranteed return.
(3)
Condition B is that at least one of the other transactions is a transaction entered
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into after the grant.
(4)
Condition C is that one or more of the transactions entered into after the grant
is a disposal which is not itself the grant of an option.
(5)
The grant is treated as taking place when the first such later disposal takes
place.
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(6)
Subsection (5) does not apply in any case where, by applying sections 144(2)
and 144A(2) of TCGA 1992, section 562(1)—
(a)
requires the grant of an option and the transaction entered into by the
grantor in fulfilment of the grantor’s obligations under the option to be
treated as a single transaction, or
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(b)
determines when such a single transaction is to be treated as entered
into,

and that requirement or determination has a different effect from subsection
(5).

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 12 — Disposals of futures and options involving guaranteed returns
249

564
Deemed disposal where futures run to delivery or options are exercised
(1)
This section applies if there are two or more related transactions (see section
566) in relation to which conditions A and B are met.
(2)
Condition A is that one of the transactions is the creation or acquisition (by the
making or receiving of a grant or otherwise) of a future or option.
5
(3)
Condition B is that the other transaction or one of the other transactions—
(a)
is the running of the future to delivery or the exercise of the option, and
(b)
is not treated for the purposes of this Chapter as a disposal of a future
or option.
(4)
In relation to the parties to the future or option, this Chapter applies as if—
10
(a)
a disposal of the future or option takes place at the time (“the relevant
time”) immediately before the future runs to delivery or, as the case
may be, the option is exercised, and
(b)
the scheme or arrangements by reference to which the transactions are
related transactions provide for the disposal.
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(5)
In the case of a person whose rights and entitlements under the future or
option have a market value at the relevant time, the disposal referred to in
subsection (4)(a) is taken to be for a consideration equal to that market value.
(6)
In the case of any other party to the future or option (“P”), the disposal is
taken—
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(a)
to be made for a nil consideration, and
(b)
to involve P in incurring costs equal to the release amount.
(7)
In subsection (6) “the release amount” means the amount which P might
reasonably have been expected to pay, in a transaction at arm’s length entered
into at the relevant time, for the release of P’s obligations and liabilities under
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the future or option.
(8)
Section 144(2) and (3) of TCGA 1992 are ignored for the purposes of
subsections (1) to (3).
565
Interpretation of section 564
(1)
References in section 564 to the running of a future to delivery are references
30
to performing (and so discharging) the obligations owed under the commodity
or financial futures contract in question to the party to the future whose rights
as a party relate to the underlying subject matter.
(2)
In subsection (1) the reference to the underlying subject matter is a reference to,
or to the value of, the commodities, currencies, shares, stock or securities,
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interest rates, indices or other matters—
(a)
to which the future is referable, or
(b)
to the value of which it is referable.
(3)
In section 564 and this section “party”, in relation to a future or option, means
one of the persons who—
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(a)
has any right or entitlement comprised in or arising under the future or
option, or
(b)
is subject to any obligation or liability so comprised or arising.

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 12 — Disposals of futures and options involving guaranteed returns
250

(4)
In section 564 “market value” has the same meaning as in TCGA 1992 (see
sections 272 to 274).
566
When transactions are related
(1)
For the purposes of this Chapter, two or more transactions are related if all of
them are entered into in pursuance of the same scheme or arrangements.
5
(2)
For this purpose the cases where any two or more transactions are to be taken
to be entered into in pursuance of the same scheme or arrangements include
any case where it would be reasonable to assume from one or more of the
matters specified in subsection (3) that none of them would have been entered
into independently of the others.
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(3)
The matters are—
(a)
the likely effect of the transactions,
(b)
the circumstances in which the transactions are entered into, and
(c)
the circumstances in which any one of the transactions is entered into.
(4)
Nothing in this Chapter prevents transactions from being related transactions
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just because they are transactions—
(a)
with different parties, or
(b)
with parties different from the parties to the scheme or arrangements in
pursuance of which they are entered into.
(5)
In the case of a transaction which is a disposal, the references in this section to
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entering into the transaction are references to making the disposal.
(6)
In this section “scheme or arrangements” includes schemes, arrangements and
understandings of any kind, whether or not they are legally enforceable.
Losses
567
Losses
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(1)
This section applies if—
(a)
losses are made by a person from a disposal, and
(b)
had profits or gains arisen to the person from the disposal, they would
be chargeable under this Chapter.
(2)
The losses are not to be brought into account for income tax purposes, except
30
where section 392 of ICTA (losses from miscellaneous transactions) applies.
(3)
For the purposes of that section, the losses are taken to be made at the time
when the disposal occurs.
(4)
For the treatment of the losses for capital gains tax purposes, and how TCGA
1992 applies where a profit arises or a loss is made from a deemed disposal
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under section 564(4), see sections 148A to 148C of that Act.