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Covered Warrants I

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26. Tax

The below is a summary of the tax treatment for covered warrants for a UK resident.

1. Stamp duty

   Stamp duty is levied on the buying of shares, at a rate of 0.5%. In the case of covered warrants, it depends if the warrants are:

   1. Cash-settlement. Upon exercise of the warrant, cash changes hands but no shares. Because, no shares are involved in the transaction, there is no stamp duty on cash-settled covered warrants.
   2. Physical settelement. Upon exercise of the warrant, shares change hands, and so stamp duty (at 0.5%) is levied on purchases of this type of covered warrant.

   Details of whether a warrant is cash, or physically, settled will always be given in the warrant’s Offering Circular - which investors should always check before buying a warrant.

   Note: the great majority of covered warrants will be cash-settled, and therefore there will no stamp duty payable.

2. Income tax

   There is no income from warrants. For example, holders of stock warrants have no entitlement to receive dividends from the underlying company. Because there is no income, there is no income tax levied on covered warrants.

3. Capital gains tax

   Regarding capital gains tax (CGT) covered warrants are treated the same as shares.

   Taper relief

   Although taper relief does apply to long term holdings in warrants, covered warrants are essentially shorter term trading instruments, and as such taper relief will rarely be applicable.

Summary

1. Stamp duty	Usually no	Only applied to physically settled warrants - which are not common
2. Income tax	No	Warrants have no income
3. Capital gains tax	Yes	Treatment is the same as shares

Note: Investors should always check the warrant’s Offering Circular (usually available on the issuer’s web site). This document will give details of the tax treatment of the warrant.

1. Introduction 2. What are covered warrants? 3. Comparison between corporate warrants and covered warrants 4. Advantages of warrants 5. Advantages of warrants – the magic of gearing 6. Disadvantages of warrants 7. Advantages & disadvantages - a summary 8. International warrants markets 9. UK warrant market 10. Types of covered warrant I (warrant terms) 11. Types of covered warrant II (underlying assets) 12. Types of covered warrant III (exotics) 13. Information on warrant terms 14. Warrant trading 15. Warrant pricing 16. Basic analysis I (underlying asset) 17. Basic analysis II (prices and terms) 18. Basic analysis III (gearing) 19. Basic analysis IV (intrinsic value) 20. Basic analysis V (premium) 21. Advanced analysis I (Black-Scholes Model) 22. Advanced analysis II (volatility) 23. Advanced analysis III (the greeks) 24. Risk 25. Trading strategies 26. Tax 27. Conclusion

Recommend Reading

• Andrew McHattie on Covered Warrants

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