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HMRC internal manual

Corporate Finance Manual

Derivative contracts: group continuity: transfers before 16 March 2005

Effect of CTA09/S625: transfers before 16 March 2005

Where the group continuity rules apply to a transfer of a derivative contract before 16 March 2005, the normal computational rules of CTA09/PT7/CH5 are modified for both the transferor and transferee company. There are two legs to this.

First, credits or debits relating to the transfer are ignored. In a typical case, the accounts of the transferor company will show a profit (if an in-the-money derivative is transferred at fair value) or a loss (if the derivative is out of the money). This profit or loss is not brought into account. But the disregard does not extend to credits or debits that have nothing to do with the transfer - these are still brought into account on the appropriate company.

For example, debits and credits relating to periodic payments under a swap contract, which are unrelated to the transfer, will be brought into account on the transferor on the same basis as they are shown in that company’s accounts. The same applies to the transferee.

The legislation was amended by FA 2003 to make it clear that foreign exchange differences on the contract arising up to the date of transfer are brought into account by the transferor company, while exchange gains or losses arising after the transfer are brought into account by the transferee.

The second leg of the tax treatment is that the transferor and transferee are deemed to be the same company. The credits and debits that are brought into account by the transferee company are computed on the basis that the ‘deemed single company’ acquired the contract. In practical terms, this means that the transferee company ‘inherits’ the carrying value at which the contract was shown in the transferor’s accounts. There will in most cases be a mismatch between the actual carrying value of the contract in the transferee’s accounts, and the value to be adopted for tax purposes.

CFM53060 gives examples.