An important class of investment instruments available to retail investors are structured products (SP). These are usually designed to display income-like features (coupons) but whose occurence or amount is contingent on the performance of an underlying equity name, usually major indices such as FTSE 500 or Euro Stoxx 50 - other flavours surely exist, but the ones I mentioned seem to be the more common.

Typically, an SP is said to have capital at risk whenever the investor suffers a capital loss if the underlying finishes below a certain level at the deal’s expiry. These barriers are usually defined as a percentage of the index initial level.

I have been told one reason for including such barriers (aside from enhancing the contingent coupons) is for tax purposes: by introducing the possibility of capital loss, any income from the product can be treated under capital gains tax (CGT) and avoid income tax rate treatment. I am unsure which country my interlocutor was thinking about, but I believe he was referring to the UK.

I have been skimming through the internet, but I have been unable to find any such information.

Is the aforementioned tax treatment allowed for such products in the UK and if so what conditions must the SP satisfy to benefit from it? I suspect if this is allowed, the coupons must be deferred until the instrument’s expiry.


1 Answer 1


Following additional research, as of 2023, CGT treatment is subject to interpretation under UK law and seemingly permitted for structured products when there is a "practical likelihood" for capital to be at risk.

The latest applicable law dates back from 2013, when the UK government enacted new rules for the tax status of SP. The goal was to prevent certain financial instruments, which are designed to be economically equivalent to a deposit, from paying the lower CGT (currently at 28% against marginal income tax rates of 40% and 45% respectively): this is known as "disguised interest".

The new rules set forth by HMRC establish 3 principles to determine whether certain retail cash flows amount to disguised interest [1]:

  1. "it is reasonable to assume that its return is a return by reference to the time value of money";
  2. "the return is at a rate reasonably comparable to what is, in all circumstances, a commercial rate of interest"; and
  3. "at the relevant time there is no practical likelihood that its return will cease to be produced in accordance with the arrangements".

HMRC Savings And Investment Manual (SAIM) refers to these three principles as time value of money; commercial rate of interest; and practical likelihood of return respectively, under paragraph SAIM2730 [2]. Additionally, paragraph SAIM2810 discusses equity/commodity SP [2]:

Whether or not each such product is within the disguised interest provisions will depend on the practical likelihood of the specified movements in the index actually occurring. In most cases this can only be determined by examining the component features of the index.

In practice it does seem like SP distributors advise clients that certain structures can benefit from CGT treatment. Consider for example the following product issued by Crédit Agricole and distributed by Walker Crips, "UK 95% Annual Kick-out Plan" [4]:

  • If on any annual observation date the FTSE 100 closes at or above 95% of its initial value, the product expires with invested capital returned, plus a 8.6% coupon for each year the plan has been in force.
  • If after 7 years the product has not met the above condition (including on the final date), then the invested capital is returned in full provided the final performance of the FTSE 100 is -35% or better; otherwise, capital is returned in line with the index performance.

It is natural to interpret there is a "practical likelihood" for the coupons to not be paid. What is more, the investor is subject to the risk of loss on his investment - independently on the credit status of the issuer. These likelihoods are naturally calibrated through the barrier levels (for coupon payments and capital return respectively). Consequently, the documentation prepared by the distributor Walker Crips states:

It is Walker Crips’ understanding that the returns you may receive on any direct investment in this Plan are subject to Capital Gains Tax under present legislation.

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