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Tax changes favour a nascent property derivatives market

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New tax rules could help the UK take the lead in the nascent property derivatives market in the second half of 2004.

The rules will treat non-trading profits, gains and losses on some property derivatives as capital gains and losses. So property derivatives that track the value of an underlying property, rather than just rental income derived from it, or total-return derivatives that track both income and capital returns, will get the appropriate tax treatment.

?Users want to match the derivative to the underlying asset,? says Ed Stacey, managing director, derivatives, at Eurohypo AG. ?There has been ambiguity over whether a property derivative would be subject to capital gains tax rules or income tax rules.?

This ambiguity meant tax was not consistently payable by buyers and sellers of protection when a property derivatives contract was settled. Investors in property derivatives didn?t get the necessary tax deductions if they had to pay under the contract.

The UK government announced the changes in its 2004 budget proposals. They will come into effect when the budget receives royal assent in July or August.

Property derivatives are not unknown in the UK.

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