Taxation of Short Box Spread Options

Box spreads are options combination strategies with guaranteed pay-offs upon exercise. I'm aware that the payoff from buying a box spread is subject to income tax due to the legislation on "disguised interest". However, the legislation and guidance does not provide any mention of the borrowing party in any "disguised interest" arrangement and therefore has no obvious relevance to box spread sellers. Selling a box spread involves buying a put and selling a call at a lower strike, and buying a call and selling a put at a higher strike with all legs having the same expiry. When selling/shorting a box spread, a credit is provided that effectively results in the seller borrowing from financial markets. Is the taxation of such an arrangement handled differently from other options? Or are each of the option legs treated separately with CGT calculated in the normal way? If the latter is true, my understanding is that each long leg for a cash-settled financial option is calculated by using the option premium (plus associated fees) as the acquisition cost and the sale proceeds or received payment upon exercise as the disposal proceeds. The credit from short legs are considered an immediate capital gain equivalent to the credit received which can only be adjusted once exercised or repurchased (position closed). The cost to close a short position or upon exercise can be added as the acquisition cost. As long as the position is closed before calculating CGT, the acquisition cost can be added. The disposal date is the date that the option was originally sold.

Hi,

Specific legislation provides that certain disposals which would have been dealt with under capital gains rules, are instead to give rise to income profits or losses. This applies in cases where schemes and arrangements involving the use of options and/or futures are designed to give a guaranteed return. Please see Chapter 12, Part 4 ITTOIA 05 and the Capital Gains Manual at reference CG56200 for more information.

CG56200 - Shares and securities: Futures: artificial transactions in futures/options

For capital gains purposes, an option is a chargeable asset - please see TCGA92/S21(1)(a). Special rules for the capital gains treatment of options can be found at TCGA/S144-S148. The guidance at CG12311 onwards, addresses the capital gains treatment of options in general, while at CG55400 onwards you will find guidance on quoted options to subscribe for shares in a company, traded options and financial options. 

HMRC does not generally provide clearance on the taxation consequences of a transaction. Where, however, an individual has considered the relevant legislation and guidance, has not found the guidance they need and remain uncertain of HMRC's interpretation of the tax legislation relating to a particular transaction, they can consider making a non-statutory clearance application. If such an application is made and HMRC accepts that the legislation and guidance does not adequately cover the circumstances outlined, it will supply a written response.

Find out about the Non-Statutory Clearance Service

Thank you.

Thank you for the reply. ITTOIA05/PT4/CH12 has been repealed by the Finance Act 2013 and replaced with ITTOIA05/PT4/CH2A. This new chapter states: "The person liable for any tax charged under this Chapter is the person receiving or entitled to the return or the part of the return." As the short seller of a box spread (that acts as a borrower), is not receiving or entitled to a return that is "economically equivalent to interest", then it appears as if the rules do not apply to the seller under the new legislation and ordinary CGT rules apply to each option in any short box spread. However it appears, the purchaser (long position) of the box spread would be subject to income tax as the return is akin to interest.