Annex 1: Minor changes in the law made by the Act: Change 101: Disposals of futures and options involving guaranteed returns: foreign non-trading income: section 555
This change provides for profits and gains, other than trading profits, that arise from disposals of futures and options involving guaranteed returns and fall within Schedule D Case V to be charged to tax under Chapter 12 of Part 4 of this Act (which rewrites Schedule 5AA to ICTA: disposals of futures and options involving guaranteed returns).
Paragraph 1(2) of Schedule 5AA to ICTA excludes from the charge under that Schedule “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 Case V of Schedule D”. It appears that the intention in mentioning Schedule D Case V was to exclude foreign trade profits, rather than all income that falls into Schedule D Case V.
Following the decision in Cooper v Stubbs (1925), 10 TC 29 CA, profits of the kind charged by Schedule 5AA to ICTA would fall into Schedule D Case VI if they were from a source in the United Kingdom and not trading profits. So if such profits arose from a foreign possession other than a trade, they would be chargeable under Schedule D Case V. However, income from such dealing is extremely unlikely to arise outside the United Kingdom in the hands of a United Kingdom resident.
Section 128(1) of ICTA exempts from any charge to tax under Schedule D “any gain arising to a person in the course of dealing in commodity or financial futures or in qualifying options, which is not chargeable to tax in accordance with Schedule 5AA to ICTA and apart from [that section] would constitute profits or gains chargeable to tax under Schedule D otherwise than as the profits of a trade”.
The result of a person’s gains of this kind being exempted by section 128 is that the person’s outstanding obligations under any futures contract entered into in the course of the dealing in question and any qualifying option granted or acquired in the course of it are regarded under section 143(1) of TCGA as chargeable assets, so that gains on their disposal fall within that Act.
Therefore if all gains from disposals of futures and options involving guaranteed returns that are foreign income within Schedule D Case V, other than those that constitute trade profits, are excluded from the charge under Schedule 5AA to ICTA by paragraph 1(2) of that Schedule, they are exempted from income tax, only to be treated as capital gains. There is no obvious reason why income of this sort should have been treated in this way. So it appears that paragraph 1(2) of Schedule 5AA to ICTA should have excluded from the charge under that Schedule only profits or gains charged to tax under Schedule D Case I or Case V “as the profits of a trade”, so as to correspond with the wording of section 128(1) of ICTA.
Schedule 5AA to ICTA is rewritten in Chapter 12 of Part 4 of this Act and the charge in section 555 does not exclude foreign profits and gains from disposals. The former residual charge under Schedule D Case V on foreign profits and gains from disposals that are not trading profits is rewritten in Chapter 8 of Part 5 of this Act. Since the charge in section 687 of that Chapter only applies to income not otherwise charged to income tax, it will not apply to foreign profits charged under Chapter 12 of Part 4. So they will fall solely within that Chapter. The exemption under section 128 of ICTA is rewritten in section 779 but will not apply to these foreign profits, since it only applies to income within Chapter 8 of Part 5 of this Act.
This change is adverse to some taxpayers and favourable to others in principle. But it is expected to have no practical effect as it is in line with current practice.