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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Derivative contracts: embedded derivatives: prepaid equity forwards

Hybrid derivatives that are bifurcated

CTA09/S592 is aimed particularly at prepaid equity forwards of the type discussed in the Special Commissioners case of HSBC Life (UK) Ltd v Stubbs (SpC295). In order for the section to apply, it is necessary for the contract as a whole to be a hybrid derivative that meets the condition in S579(1)(b) - the case where it would be a derivative but for an up-front payment feature. It must contain an embedded derivative whose underlying subject matter is shares (or units in a unit trust).

Where the conditions for application of the section are met, the contract is bifurcated into a loan relationship and a relevant contract, and the relevant contract is treated as meeting one of the conditions of CTA09/S591, and therefore falling outside of Part 7. CTA09/S592(2) then specifically provides that it is a chargeable asset.

Contracts to which S592 applies are unlikely to be seen outside of the life assurance industry, and detailed guidance is in the Life Assurance Manual.

The predecessor to S592, FA02/SCH26/PARA45M, was substantially amended by SI2006/3269, and this guidance applies only to instruments held on or after 30 December 2006 in an accounting period ending on or after that date.