Income and Corporation Taxes Act 1988

SCHEDULE 5AA U.K. Guaranteed returns on transactions in futures and options

Modifications etc. (not altering text)

C1 Sch. 5AA modified (24.2.2003) by Proceeds of Crime Act 2002 (c. 29), Sch. 10 para. 8 (with Sch. 10 para. 10); S.I. 2003/120, art. 2, Sch. (with arts. 3, 4 (as amended by S.I. 2003/333, art. 14))

Charge to tax etc. U.K.

1 (1) Subject to sub-paragraph (2) below, profits and gains arising from a transaction to which this Schedule applies (including those which, apart from this sub-paragraph, would be taken to be of a capital nature) shall be treated, when realised—

(a) as income of the person by whom they are realised; and

(b) as chargeable to tax under Case VI of Schedule D for the chargeable period in which they are realised.

(2) Sub-paragraph (1) above does not apply to—

(a) so much of any profits or gains arising to a person from a transaction as are charged to tax in his case under Case I or V of Schedule D;

(b) F1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(c) F1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F2 (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4) For the purposes of this Schedule the profits and gains arising from a transaction to which this Schedule applies are to be taken to be realised at the time when the disposal comprised in the transaction takes place.

(5) For the purposes of sections 392 F3 . . . any loss in a transaction to which this Schedule applies is to be taken to be sustained at the time when, in accordance with sub-paragraph (4) above, any profits or gains arising from that transaction would have been realised.

(6) Subject to sub-paragraph (7) below, the following, namely—

(a) profits and gains to which sub-paragraph (1) above applies, and

(b) losses in transactions the profits and gains from which (if there were any) would be profits and gains to which that sub-paragraph applies,

shall not be brought into account for the purposes of income tax F4 . . . or capital gains tax except by virtue of this Schedule and, in the case of losses, section 392 F4 . . . .

(7) F5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F1 Sch. 5AA para. 1(2)(b)(c) repealed (with effect in accordance with s. 83(3) of the repealing Act) by Finance Act 2002 (c. 23), Sch. 27 para. 14(2)(a), Sch. 40 Pt. 3(13), Note (with Sch. 28)

F2 Sch. 5AA para. 1(3) repealed (with effect in accordance with s. 83(3) of the repealing Act) by Finance Act 2002 (c. 23), Sch. 27 para. 14(2)(b), Sch. 40 Pt. 3(13), Note (with Sch. 28)

F3 Words in Sch. 5AA para. 1(5) repealed (with effect in accordance with s. 83(3) of the repealing Act) by Finance Act 2002 (c. 23), Sch. 27 para. 14(2)(c), Sch. 40 Pt. 3(13), Note (with Sch. 28)

F4 Words in Sch. 5AA para. 1(6) repealed (with effect in accordance with s. 83(3) of the repealing Act) by Finance Act 2002 (c. 23), Sch. 27 para. 14(2)(d), Sch. 40 Pt. 3(13), Note (with Sch. 28)

F5 Sch. 5AA para. 1(7) repealed (with effect in accordance with s. 83(3) of the repealing Act) by Finance Act 2002 (c. 23), Sch. 27 para. 14(2)(e), Sch. 40 Pt. 3(13), Note (with Sch. 28)

Modifications etc. (not altering text)

C2 Sch. 5AA para. 1(6)(7) modified (19.3.1997) by Finance Act 1997 (c. 16), s. 80(7)

Transactions to which Schedule applies U.K.

2 (1) This Schedule applies to a transaction if—

(a) it is a disposal of futures or options;

(b) it is one of two or more related transactions designed to produce a guaranteed return; and

(c) the guaranteed return comprises the return from that disposal or from a number of disposals of futures or options, of which that disposal is one, taken together.

(2) For the purposes of this Schedule two or more related transactions are transactions designed to produce a guaranteed return if, taking the transactions together, it would be reasonable to assume, from either or both of—

(a) the likely effect of the transactions, and

(b) the circumstances in which the transactions are entered into, or in which any of them is entered into,

that their main purpose, or one of their main purposes, is or was the production of a guaranteed return from one or more disposals of futures or options.

[F6 (3) F7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .]

Textual Amendments

F6 Sch. 5AA para. 2(3) inserted (with effect in accordance with s. 78(6) of the amending Act) by Finance Act 2002 (c. 23), s. 78(2)

F7 Sch. 5AA para. 2(3) repealed (with effect in accordance with s. 83(3) of the repealing Act) by Finance Act 2002 (c. 23), Sch. 27 para. 14(3), Sch. 40 Pt. 3(13), Note (with Sch. 28)

Production of guaranteed return U.K.

3 (1) For the purposes of this Schedule a guaranteed return is produced from one or more disposals of futures or options wherever (taking all the disposals together where there is more than one) risks from fluctuations in the underlying subject matter are so eliminated or reduced as to produce a return from the disposal or disposals—

(a) the amount of which is not, to any significant extent, attributable (otherwise than incidentally) to any such fluctuations; and

(b) which equates, in substance, to the return on an investment of money at interest.

(2) For the purposes of sub-paragraph (1) above the cases where risks from fluctuations in the underlying subject matter are eliminated or reduced shall be deemed to include any case where the main reason, or one of the main reasons, for the choice of that subject matter is—

(a) that there appears to be no risk that it will fluctuate; or

(b) that the risk that it will fluctuate appears to be insignificant.

(3) In this paragraph the references, in relation to a disposal of futures or options, to the underlying subject matter are references to or to the value of the commodities, currencies, shares, stock or securities, interest rates, indices or other matters to which, or to the value of which, those futures or options are referable.

Disposals of futures or options U.K.

4 (1) For the purposes of this Schedule a disposal is a disposal of futures or options if it consists in—

(a) the disposal of one or more futures;

(b) the disposal of one or more options; or

(c) the disposal of one or more futures together with one or more options.

(2) Subject to sub-paragraph (4) below, any question for the purposes of this Schedule as to whether there is a disposal falling within sub-paragraph (1)(a) to (c) above, or as to when such a disposal is made, shall be determined, on the assumptions specified in sub-paragraph (3) below, in accordance with—

(a) section 143(5) and (6), 144 and 144A of the 1992 Act (closing out and settlement of futures contracts and rules in relation to options); and

(b) the other provisions having effect for determining for the purposes of that Act whether or when an asset is disposed of;

and references in this Schedule to entering into a transaction are references, in relation to a transaction consisting in a disposal, to the making of the disposal.

(3) Those assumptions are—

(a) that all futures are assets for the purposes of the 1992 Act;

(b) that the words “in the course of dealing in commodity or financial futures” are omitted in each place where they occur in section 143(5) and (6) of that Act; and

(c) that any reference in that Act to a financial option within the meaning given by section 144(8) of that Act is a reference to any option that is not a traded option.

(4) Subject to sub-paragraph (5) below, where—

(a) one of a number of related transactions designed to produce a guaranteed return is the grant of an option,

(b) at least one of the other transactions is a transaction entered into after the grant of the option, and

(c) the transaction or transactions entered into after the grant of the option is or include a disposal which is not itself the grant of an option,

the disposal consisting in the grant of the option shall be deemed for the purposes of this Schedule to be a disposal made on the first occasion after the grant of the option when one of the other transactions which is a disposal but is not itself the grant of an option is entered into.

[F8 (4A) F9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .]

(5) Nothing in sub-paragraph (4) above affects so much of sub-paragraph (2) above as (by applying section 144(2) or 144A(2) of the 1992 Act (cases where options are exercised))—

(a) requires the grant of an option and the transaction entered into by the grantor in fulfilment of his obligations under that option to be treated for the purposes of this Schedule as a single transaction; or

(b) determines the time at which such a single transaction is to be treated for the purposes of this Schedule as entered into.

(6) In this paragraph—

• “future” means outstanding rights and obligations under a commodity or financial futures contract;

• “option” means a traded option or an option which is not a traded option but is an option relating to—

  (a)

  currency, shares, stock, securities or an interest rate; or

  (b)

  rights under a commodity or financial futures contract;

  [F10 and includes any liability or entitlement under an option.]

• “traded option” has the meaning given for the purposes of subsection (4) of section 144 of the 1992 Act by subsection (8) of that section.

Textual Amendments

F8 Sch. 5AA para. 4(4A) inserted (with effect in accordance with s. 78(6) of the amending Act) by Finance Act 2002 (c. 23), s. 78(3)

F9 Sch. 5AA para. 4(4A) repealed (with effect in accordance with s. 83(3) of the repealing Act) by Finance Act 2002 (c. 23), Sch. 27 para. 14(4), Sch. 40 Pt. 3(13), Note (with Sch. 28)

F10 Words in Sch. 5AA para. 4(6) inserted (with effect in accordance with s. 99(5) of the amending Act) by Finance Act 1998 (c. 36), s. 99(4)

Futures running to delivery and options exercised U.K.

4A (1) This paragraph applies where for the purposes of this Schedule—

(a) there are or, apart from section 144(2) or (3) of the 1992 Act, would be two or more related transactions;

(b) one of those transactions is or would be the creation or acquisition (by the making or receiving of a grant or otherwise) of a future or option;

(c) the other transaction, or one of the other transactions, is or would be the running of the future to delivery or the exercise of the option; and

(d) the transaction mentioned in paragraph (c) above is not treated for those purposes as a disposal of a future or option.

(2) This Schedule shall have effect in relation to the parties to the future or option as if the transaction specified in sub-paragraph (3) below—

(a) were a transaction for which the scheme or arrangements by reference to which the transactions are related transactions provided; and

(b) were a transaction which in fact 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.

(3) That transaction is a disposal of the future or option which—

(a) in the case of a person whose rights and entitlements under the future or option have a market value at the relevant time, consists in a disposal for a consideration equal to that market value; and

(b) in the case of any other party to the future or option, consists in a disposal which—

(i) is made for a nil consideration; and

(ii) involves that person in incurring costs equal to the amount specified in sub-paragraph (4) below.

(4) That amount is the amount which that party to the future or option might reasonably have been expected to pay, in a transaction at arm’s length entered into at the relevant time, for the release of his obligations and liabilities under the future or option.

(5) Where, in a case in which a transaction is deemed to take place by virtue of sub-paragraph (2)(b) above (“the deemed transaction")—

(a) any profits or gains arising from the deemed transaction are chargeable to tax under Case VI of Schedule D in accordance with paragraph 1(1) above, or

(b) any loss arising in the deemed transaction is brought into account for the purposes of section 392 F11 . . . in accordance with paragraph 1(5) above,

amounts taken into account or allowable as deductions in computing those profits or gains, or that loss, shall not be excluded by virtue of section 37 or 39 of the 1992 Act (exclusion of amounts taken into account or allowable for the purposes of the taxation of income and profits) from any computation made for the purposes of that Act, but paragraph 1(6) above shall be given effect to in relation to the 1992 Act in accordance with sub-paragraphs (6) to (10) below.

(6) Where there are profits or gains arising to any person (“the taxpayer") from the deemed transaction, an increase equal to the amount of those profits or gains shall be made in the amount that would otherwise be taken for the purposes of the 1992 Act to be—

(a) the amount of the consideration for the acquisition of any asset acquired by the taxpayer by means of the future running to delivery or, as the case may be, by the exercise of the option; or

(b) the amount of the consideration for the acquisition by him of any asset disposed of by him by means of the future running to delivery or, as the case may be, in consequence of the exercise of the option;

but any increase made by virtue of paragraph (b) above in the amount of any consideration shall be disregarded in computing the amount of any indexation allowance.

(7) Where there is a loss for any person (“the taxpayer") in the deemed transaction—

(a) a reduction equal to the smaller of the amount of the loss and the amount to be reduced shall be made in the amount that would otherwise be taken for the purposes of the 1992 Act to be the amount of the consideration mentioned in sub-paragraph (6)(a) or (b) above; and

(b) the amount (if any) by which the amount of the loss exceeds the amount to be reduced shall be deemed to be a chargeable gain accruing to the taxpayer on the occasion specified in sub-paragraph (8) below.

(8) That occasion is—

(a) in a case where the consideration mentioned in paragraph (a) of sub-paragraph (6) above has been reduced to nil, the first occasion after the acquisition mentioned in that paragraph when there is a disposal of the asset in question; and

(b) in a case where it is the consideration mentioned in sub-paragraph (6)(b) above that has been reduced to nil, the occasion of the disposal made by the taxpayer by means of the future running to delivery or, as the case may be, in consequence of the exercise of the option.

(9) For the purposes of sub-paragraphs (6) and (7) above, where in any case there is a deemed disposal of an option by the person who granted it, any determination—

(a) of the profits arising to the grantor of the option from that disposal, or

(b) of the losses for the grantor in that disposal,

shall be made as if that disposal and the disposal by which the option was granted were a single transaction.

(10) In sub-paragraph (8) above—

(a) the reference in paragraph (a) to a disposal of the asset in question includes a reference to anything that would be such a disposal but for the provisions of section 116(10) or 127 of the 1992 Act; and

(b) the references in each of paragraphs (a) and (b) to a disposal include references to a disposal which, in accordance with the 1992 Act, would (apart from sub-paragraph (7)(b) above) be a disposal on which neither a gain nor a loss accrues.

[F12 (10A) F13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .]

(11) In this paragraph—

• “future” and “option” have the same meanings as in paragraph 4 above;

• “market value” has the same meaning as in the 1992 Act;

• “party”, in relation to a future or option, means one of the persons who has any right or entitlement comprised in or arising under the future or option or who is subject to any obligation or liability so comprised or arising;

and references in this paragraph to a future running to delivery are references to the discharge by performance of the obligations owed under the commodity or financial futures contract in question to the party to the future whose rights are in relation to its underlying subject matter.

(12) Sub-paragraph (3) of paragraph 3 above applies for the purposes of sub-paragraph (11) above as it applies for the purposes of that paragraph.

Textual Amendments

F11 Words in Sch. 5AA para. 4A(5)(b) repealed (with effect in accordance with s. 83(3) of the repealing Act) by Finance Act 2002 (c. 23), Sch. 27 para. 14(5)(a), Sch. 40 Pt. 3(13), Note (with Sch. 28)

F12 Sch. 5AA para. 4A(10A) inserted (with effect in accordance with s. 78(6) of the amending Act) by Finance Act 2002 (c. 23), s. 78(4)

F13 Sch. 5AA para. 4A(10A) repealed (with effect in accordance with s. 83(3) of the repealing Act) by Finance Act 2002 (c. 23), Sch. 27 para. 14(5)(b), Sch. 40 Pt. 3(13), Note (with Sch. 28)

The return from one or more disposals U.K.

5 (1) In this Schedule references to the return from one or more disposals are references to the return on investment represented either—

(a) by the total net profits and gains arising from the disposal or disposals; or

(b) by all but an insignificant part of those net profits and gains.

(2) For the purposes of the references in sub-paragraph (1) above to the total net profits and gains from any two or more disposals, it shall be assumed that profits and gains realised, and losses sustained, by persons who are associated with each other are all realised or sustained by the same person.

(3) For the purposes of sub-paragraph (2) above persons are associated with each other in relation to any two or more disposals made in pursuance of the same scheme or arrangements if—

(a) each of those persons shares or is to share, to an extent determined for the purposes of or in accordance with the scheme or arrangements, in the net return represented by the aggregate of all the profits, gains and losses realised or sustained on those disposals;

(b) those persons are associated companies at the time when the last of those disposals is made; or

(c) those persons have been associated companies at an earlier time falling after the first occasion on which a transaction was entered into in pursuance of the scheme or arrangements.

(4) In this paragraph—

• “associated company” shall be construed in accordance with section 416; and

• “scheme or arrangements” shall be construed in accordance with paragraph 6(4) below.

Related transactions U.K.

6 (1) For the purposes of this Schedule two or more transactions are related if all of them are entered into in pursuance of the same scheme or arrangements.

(2) Nothing in this Schedule shall be construed as preventing transactions with different parties, or transactions with parties different from the parties to the scheme or arrangements in pursuance of which they are entered into, from being related transactions.

(3) For the purposes of this paragraph the cases in which any two or more transactions are to be taken to be entered into in pursuance of the same scheme or arrangements shall include any case in which it would be reasonable to assume, from either or both of—

(a) the likely effect of the transactions, and

(b) the circumstances in which the transactions are entered into, or in which any of them is entered into,

that neither of them or, as the case may be, none of them would have been entered into independently of the other or others.

[F14 (3A) F15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .]

(4) In this paragraph “scheme or arrangements” includes schemes, arrangements and understandings of any kind, whether or not legally enforceable.

Textual Amendments

F14 Sch. 5AA para. 6(3A) inserted (with effect in accordance with s. 78(6) of the amending Act) by Finance Act 2002 (c. 23), s. 78(5)

F15 Sch. 5AA para. 6(3A) repealed (with effect in accordance with s. 83(3) of the repealing Act) by Finance Act 2002 (c. 23), Sch. 27 para. 14(6), Sch. 40 Pt. 3(13), Note (with Sch. 28)

Special rule for trusts U.K.

7 (1) Where any profits or gains are treated, in accordance with paragraph 1 above, as income arising to trustees for any year of assessment, the relevant part of that income shall be treated for the purposes of the Tax Acts as if it were income to which section 686 applies (income taxable at the rate applicable to trusts).

(2) In sub-paragraph (1) above the reference to the relevant part of any income is a reference to so much (if any) of that income as—

(a) does not fall to be treated for the purposes of the Income Tax Acts as income of a settlor;

(b) is not income arising under a trust established for charitable purposes; and

(c) is not income from investments, deposits or other property held for any such purposes as are mentioned in sub-paragraph (i) or (ii) of section 686(2)(c) (property held for pension purposes).

(3) Subsection (6) of section 686 (meaning of “trustees” etc.) shall apply for the purposes of this paragraph as it applies for the purposes of that section.

Transfer of assets abroad U.K.

8 For the purpose of determining whether an individual ordinarily resident in the United Kingdom has a liability for income tax in respect of any profit or gain which—

(a) is realised by a person resident or domiciled outside the United Kingdom, and

(b) arises from a transaction to which this Schedule applies,

sections 739 and 740 (transfer of assets abroad) shall have effect as if that profit or gain, when realised, constituted income becoming payable to the person resident or domiciled outside the United Kingdom.

Apportionment in the case of insurance companies U.K.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.K.

9 F16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F16 Sch. 5AA para. 9 repealed (with effect in accordance with s. 83(3) of the repealing Act) by Finance Act 2002 (c. 23), Sch. 27 para. 14(7), Sch. 40 Pt. 3(13), Note (with Sch. 28)