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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Derivative contracts: embedded derivatives: hybrid derivatives

Application of S616 to hybrid derivatives

‘Hybrid derivative’ is the term used in the legislation for a contract that

  • viewed as a whole, is a relevant contract, and - while not accounted for as a derivative - satisfies the condition in CTA09/S579(1)(b),
  • is separated, in accordance with GAAP, into a host contract and one or more embedded derivatives, and
  • where the host contract, viewed in isolation, would be a relevant contract.

Under CTA09/S584, a company with such a hybrid derivatives is treated as being party to the embedded derivatives and, separately, to the relevant contract represented by the host contract. See CFM50410.

CTA09/S616 also applies to hybrid derivatives and that ensures such contracts are also, in effect, taxed on the basis of ‘old’ UK GAAP. The contract is treated under S616(3) as though the embedded derivative or derivatives were closely related to the host contract. Credits and debits on the embedded derivative are not brought into account, nor is fair value accounting used for the contract as a whole.

The conditions in S616(1) (see CFM52530) apply in the case of hybrid derivatives as well. In particular, where CTA09/S592 applies to a hybrid derivative (CFM52580), that treatment will take priority. An election under CTA09/S617 to disapply S616 will apply to any hybrid derivatives held by a company, as well as to derivatives embedded into other non-loan contracts.