CG56101 | Futures: financial futures: contracts for differences: example

From HM Revenue & Customs · Capital Gains Manual

In both examples below, the shares in ABC Plc stand at £5 per share at commencement.


Example 1

An investor expects the shares to rise, and enters into a long position over 20,000 shares. He puts up a deposit of £20,000 (20% of the full value of £100,000). The broker who is counter-party to the deal debits the investor’s account with “interest” on the unpaid balance of £80,000 at 0.75% per calendar month (£600 per month). After two months, the company pays a dividend of 2p per share, and the broker credits the account with £400 (equivalent to the dividend on 20,000 shares).

After three months the shares stand at £6.50 per share, and the investor closes out the contract. The increase in value of 20,000 shares over the life of the contract is £30,000, and this is credited to the investor’s account. The broker also charges commission of £500.

In summary, the account is as follows:

DescriptionAmount
Deposit£20,000
Less “interest” - 3 months @ £600 pm£ 1,800
-£18,200
Plus “dividend”£ 400
-£18,600
Plus increase in value of shares£30,000
-£48,600
Less commission£ 500
Final balance£48,100

The chargeable gain is £28,100, the difference between the amount deposited and the closing balance. This can be expressed as:

DescriptionDeductionAmount
Increase in value of 20,000 shares-£30,000
Plus “dividend” equivalent-£ 400
--£30,400
Less “interest” charges£1,800-
Commission£ 500£ 2,300
Net gain-£28,100

If the shares had decreased in value to £4.50, the decrease in value of 20,000 shares (£10,000) would be debited from the account.

At close, the account would then be:

DescriptionAmount
Opening deposit£20,000
Less “interest” as above£ 1,800
-£18,200
Plus “dividend”£ 400
-£18,600
Less decrease in share price£10,000
-£ 8,600
Less commission£ 500
Closing balance£ 8,100

The allowable loss is £11,900, the difference between the amount deposited and the closing balance. This can be reconciled:

DescriptionAmount
Decrease in price of 20,000 shares£10,000
Plus “interest” charges£ 1,800
Commission£ 500
-£12,300
Less “dividend”£ 400
Net loss£11,900

Example 2

The investor expects the shares to fall. He enters into a short position over 20,000 shares. Once again, he deposits £20,000, 20% of the value of 20,000 shares. The broker credits “interest” of £450 per month (based on an interest rate of 0.5625% per calendar month), and debits an amount equivalent to a dividend of 2p per shares paid on 20,000 shares.

After three months, the investor closes out the contract when the share price is £3.75 per share. His account is credited with the reduction in price of 20,000 shares (£25,000).

The summarised account is:

DescriptionAmount
Opening balance£20,000
Plus “interest” for three months£ 1,350
-£21,350
Less “dividend”£ 400
-£20,950
Less commission£ 500
-£20,450
Plus reduction in share price£25,000
Closing balance£45,450

The investor has a chargeable gain of £25,450, the difference between the amount deposited and the closing balance. This can be reconciled:

DescriptionDeductionAmount
Decrease in share price-£25,000
Plus “interest” credits-£ 1,350
Net gain-£26,350
Less “dividend”£400-
Commission£500£ 900
--£25,450

If the investor was wrong, and the shares in fact increased in value to £5.75 per shares between the opening and closing of the contract, the account would be:

DescriptionDeductionAmount
Opening balance-£20,000
Plus “interest” credits-£ 1,350
--£21,350
Less “dividend” charge£ 400-
Commission£ 500-
increase in value of 20,000 shares£15,000£15,900
Closing balance-£ 5,450

The investor has an allowable loss of £14,550, the difference between the amount deposited and the closing balance. This can be reconciled as

DescriptionAmount
increase in value of the shares£15,000
less “interest” credits£ 1,350
-£13,650
plus “dividend” charge£ 400
commission£ 500
-£14,550