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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Derivative contracts: exclusions from regime: contract ceases to be derivative contract

Derivative contract becomes a chargeable asset

Where a relevant contract ceases to be a derivative contract within Part 7, CTA09/S622 provides that the company is deemed to have disposed of it at the relevant time for its notional carrying value. See CFM50830 for the meaning of ‘relevant time’ and ‘notional carrying value’.

It is also necessary, where the contract becomes a chargeable asset, to fix its deemed acquisition cost for capital gains purposes. Therefore, under CTA09/S662, the contract is deemed to have been reacquired immediately after the relevant time for its notional carrying value.


The facts are as in example 2 at CFM50820. The bank draws up accounts to 31 December. On 1 March 2009, it acquires a quoted option to subscribe for shares in A plc for £800,000. At 1 April 2009, when the option has a fair value of £750,000, the bank transfers it from its trading book and subsequently holds it as an investment. On 15 January 2010, the bank exercises the option and acquires A plc shares, which it immediately sells for £1.4 million.

The option is a derivative contract up to 1 April 2009, at which point (because of the CTA09/S591(4) exclusion for quoted options held for non-trade purposes) it becomes a chargeable asset. Under CTA09/S622, the company is treated as having disposed of the option on 1 April at its notional carrying value of £750,000. It must therefore bring a debit of £50,000 into account for Part 7 purposes, in year ended 31 December 2009.

Under CTA09/S662, it is deemed to have immediately reacquired the option for £750,000. When the bank sells the A plc shares in 2010, this £750,000 is treated as part of the acquisition cost of the shares (TCGA92/S144(3)) in computing the chargeable gain that arises on the transaction.