How are interest rate swaps taxed for a company

A company is taxed on interest rate swaps, forward currency contracts and most other derivatives under Part 7 of the Corporation Tax Act 2009, which treats all profits and losses on them as income and, as a starting point, taxes whatever the accounts put through profit or loss. That means fair value gains and losses are taxed or relieved as they arise, even before any cash changes hands. A company that uses derivatives to hedge can elect into the Disregard Regulations so that fair value movements are ignored and the derivative is taxed in step with the item it hedges.

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Which contracts count as derivative contracts?

Under section 576 of the Corporation Tax Act 2009 (CTA 2009), a contract is a derivative contract if it is a “relevant contract”, meets one of the accounting conditions and is not excluded by its underlying subject matter. Section 577 says a relevant contract is an option, a future or a contract for differences.

A future (section 581) is a contract for the sale of property with delivery at a future date and at a price agreed when the contract is made. A forward currency contract fits this description.
A contract for differences (section 582) is one whose purpose is to make a profit or avoid a loss by reference to fluctuations in the value or price of property, or in an index or other factor. An interest rate swap, where payments depend on movements in a reference rate, is the obvious example. Options, futures, insurance, guarantees and loan relationships are expressly excluded from this definition.

The main accounting condition in section 579 is that the contract is treated as a derivative for accounting purposes. In practice, a swap or forward that a company’s accounts treat as a derivative will be within Part 7. How FRS 102 measures these instruments is covered on the pages about forward currency contracts in small company accounts and hedge accounting.

How are the profits and losses worked out?

Section 571 sets the general rule that all profits arising to a company from its derivative contracts are chargeable as income. Section 594A brings in profits and losses, including those of a capital nature, and expenses incurred directly in entering into and performing the contracts. Section 595 then says the amounts are those recognised in determining the company’s profit or loss under generally accepted accounting practice.

So if a swap is carried at fair value through profit or loss, the year end revaluation is taxed or relieved along with the periodic settlement payments. Amounts that FRS 102 cash flow hedge accounting puts in other comprehensive income are not taxed at that point. Section 597(1A) brings them in when they are transferred, or recycled, into profit or loss.

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Is the swap a trading or non trading item?

Section 573 deals with contracts entered into for the purposes of a trade. The credits are trading receipts and the debits trading expenses, and the debits are deductible despite the usual bars on capital expenditure (section 53) and on expenses not wholly and exclusively for the trade (section 54).

Everything else falls under section 574. Non trading credits and debits are treated as loan relationship credits and debits and pooled with interest and other loan items to give a non trading profit or deficit, explained on the pages about loan relationships and non trading deficits. A swap that hedges a loan taken out for an investment property, for example, will usually be non trading.

What changes when a swap hedges a loan?

Following the accounts can produce volatile taxable profits when a company hedges but does not use hedge accounting, or when the hedge is not fully effective. The Disregard Regulations (SI 2004/3256) deal with this. HMRC’s guidance at CFM57075 explains that, for periods of account starting on or after 1 January 2015, regulations 7, 8 and 9 apply only if the company elects into them; without an election the default is simply to follow the accounts.

Regulation 7 covers currency contracts hedging forecast transactions or firm commitments.
Regulation 8 covers debt and commodity contracts.
Regulation 9 covers interest rate contracts hedging an asset, liability, receipt or expense, and according to CFM57290 includes cross currency swaps.

Under regulations 7 and 8, fair value movements are disregarded and brought back into account in line with the hedged item. Under regulation 9, fair value movements are disregarded and the swap is instead taxed on an “appropriate accruals basis”, broadly as if the loan and the swap were one synthetic fixed rate loan (CFM57075 and CFM57290).

How and when is the election made?

CFM57365 explains that the election under regulation 6A must be made in writing to HMRC and can cover any combination of the three regulations. A company adopting fair value accounting for a relevant contract for the first time must elect by the latest of six months from the start of the first relevant period, six months from entering into the first relevant contract and, for a company that is not large under the Senior Accounting Officer rules, 12 months from the end of that period. It is then locked in until two years after the end of the first relevant period. A late election only works for contracts entered into from a later date. CFM57360 adds that a company cannot elect for only some of its contracts of one type.

What does that look like for a fixed rate swap?

Illustration only. Property Ltd borrows £2,000,000 at a variable rate to buy an investment property and takes out a five year swap under which it pays a fixed rate and receives the variable rate. It does not use hedge accounting.

Year 1: rates fall. Property Ltd makes net swap payments of £15,000 and the swap’s fair value moves from nil to a liability of £60,000. Both amounts go through profit or loss.
Without an election, the £15,000 and the £60,000 are non trading debits in year 1, alongside the interest on the loan.
Year 2: rates rise and the liability falls to £20,000. The £40,000 improvement is a non trading credit, taxable even though no cash has been received.
With a regulation 9 election, the fair value movements of £60,000 and £40,000 are ignored. Only the net swap payments are brought in each year, so the company is taxed as if it had borrowed at a fixed rate.

HMRC’s worked example at CFM57330 shows the same effect for a company that does use cash flow hedge accounting: the fair value movements taken to reserves are disregarded and the debit each year is the fixed rate cost of the loan.

When are derivative profits taxed as capital gains instead?

A few contracts are carved out. CFM55020 lists contracts relating to real property or certain tangible movable property (section 643), equity options embedded in convertible or exchangeable securities held as creditor (section 645), exactly tracking contracts for differences embedded in share linked securities (section 648) and property based total return swaps (section 650). For these, the non trading credits and debits are computed in the normal way but taxed as chargeable gains or allowable losses under section 641. Contracts held by individuals are outside Part 7 altogether; the page on spread betting, CFDs and forex covers them.

Are there anti avoidance rules?

Yes. Under section 690, if a derivative contract has an unallowable purpose in an accounting period, the company cannot bring into account the debits, or the exchange credits, referable to that purpose on a just and reasonable apportionment. A swap entered into mainly to create a tax deductible loss, rather than to manage a real commercial risk, is the kind of arrangement this targets.

What mistakes come up most often?

Treating swap settlements as part of interest but ignoring the fair value movement in the accounts, which section 595 brings into the computation.
Assuming a loss on a swap is capital and therefore unrelieved. Section 594A expressly includes capital profits and losses.
Missing the regulation 6A deadline after taking out the first swap, then facing years of tax volatility.
Taxing cash flow hedge reserve movements when they are recognised in other comprehensive income instead of when they are recycled to profit or loss.
Classifying a swap as trading when the hedged loan funds an investment business, or the other way round.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.