188ÌåÓý

CTA09/S657

Exactly tracking contract

On 1 January 2016, Y Ltd issues a 3 year security at par £1million. The redemption price is the full issue price increased, or reduced, by the full percentage change in the value of its ordinary shares. Suppose its shares were respectively worth £40 and £50 on 1 January 2016 and 31 December 2018, an increase of 25 per cent over the life of the security. In order to be an ‘exactly tracking� contract, the security must redeem for £1.25 million.

‘Almost exactly tracking� contract

This example illustrates the position during a brief time window, for accounting periods beginning on or after 1 January 2005 and ending before 31 December 2006. For this limited period, ‘exactly tracking� could also include contracts that were ‘almost exactly tracking�.

The facts are the same as in the above example, except that the redemption price of the security is subject to a minimum of £100,000 should the value of Y Ltd’s ordinary shares fall by more than 90 per cent over the relevant period. Suppose their respective values on 1 January 2006 and 31 December 2008 were £40 and £2, a percentage decrease of 95 per cent over the life of the security. The security therefore redeems for the minimum £100,000. The contract is ‘almost exactly tracking� because this does not exceed 10 per cent of the £1million issue price.

A similar security issue in a later period would not be treated as an exactly tracking contract. The normal rules of CTA09/PT7 would apply and amounts would be treated as income, in accordance with S571.

Neither ‘exactly tracking� nor ‘almost exactly tracking�

Had the contract guaranteed a minimum of, say, £150,000 of the original loan, it could not have qualified as almost exactly tracking even in accounting periods beginning on or after 1 January 2005 and ending before 31 December 2006.

Transitional rules for contracts issued a period of account beginning before 1 January 2005

In practice, most ‘nearly exactly tracking� contracts (those with a floor of 10% or less) will have been issued in a period of account beginning before 1 January 2005, and may be regarded as subject to the grandfathering treatment provided for in CTA09/SCH10/PARA88, outlined at CFM55540 applicable to exactly-tracking contracts for differences embedded in debtor loan relationships, to which S658 would otherwise apply.