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HMRC internal manual

Corporate Finance Manual

Derivative contracts: group continuity: introduction and layout of guidance

Introduction: intra-group transfers of derivatives

CTA09/PT7/CH5 (like its loan relationships equivalent in CTA09/PT5/CH4) broadly allows a derivative contract to be transferred between two companies on a ‘tax neutral’ basis, that is without crystallising losses or bringing gains into charge.

The rule was previously at FA02/SCH26/PARA28. FA 2005 made a major change to how the rule operates for transfers of derivative contracts occurring on or after 16 March 2005.

For transfers before that date, the effect of the rule is that credits or debits relating to the transfer are disregarded. The transferor and transferee are deemed to be the same company, so that the transferee ‘inherits’ the carrying value of the derivative shown in the transferor’s accounts.

Where the transfer occurs on or after 16 March 2005, the transfer is treated as being for an amount that gives rise to neither a gain nor loss.

The main rule is set out in CTA09/S625 and is only relevant where the transferor accounts for the derivative on a historic cost basis. This will apply where the transferor uses ‘old UK GAAP’. CFM53020 explains the transactions to which the rule applies, and is relevant whether the transaction is before or after 16 March 2005.

CFM53050 explains how the rule operates for transfers before 16 March 2005.

CFM53070 explains how the rule operates for transfers on and after 16 March 2005.

Where the transferor company accounts for it at fair value (or on a mark-to-market basis), it will bring into account gains or losses for tax purposes in any case, so a neutrality rule is not necessary, so CTA09/S628 applies instead. CFM53090 has more details.

Special rules apply where a derivative contract is transferred intra-group and the transferee company then leaves the group. See CFM53110.

CFM53120 explains the transfer of derivative contracts where a UK company merges with a company or companies in other EU member states to form a European Company.

CFM53100 and CFM53130 explain the rules that were inserted to counter particular avoidance schemes using the group continuity rules.