Derivative contracts: special kinds of company: holding in OEIC, unit trust or offshore fund
Contracts over holdings in OEIC, unit trust or offshore fund
There is one circumstance in which a relevant contract (CFM50300) will always qualify as a derivative contract. That is where its underlying subject matter (CFM50500) consists wholly or partly of a ‘relevant holding’. Where such a contract would not otherwise be within CTA09/Part 7 (for example, because it fails the ‘accounting test’ (CFM50200)), CTA09/S587 specifically provides that Part 7 is to have effect as if it were a derivative contract.
A ‘relevant holding’ means
- shares in an open-ended investment company (OEIC), or
- rights under a unit trust scheme, or
- a material interest in an offshore fund,
and at any time in the period being considered the OEIC, unit trust scheme or offshore fund fails the ‘qualifying investments test’ in CTA09/S493.
Where S587 applies, credits and debits on the derivative contract must be brought into account in accordance with fair value accounting (S601/CTA09) - see CFM21620.
Contract becoming one to which Section 587 applies
Where a company is party to a relevant contract in two successive accounting periods and that contract is one which is subject to S587 for AP2 but not AP1 (and the contract was a chargeable asset), the opening value of the contract at the start of AP2 is taken to be the market value of the contract, had it been disposed of immediately before the end of AP1 (S602/CTA09). This rule therefore determines an opening value in AP2 when considering the movement in fair value of the contract for the purposes of S601/CTA09. Any gain or loss on the deemed disposal is deferred until the company ceases to be a party to the contract - see below.
Company ceases to be party to the relevant contract
Where the company ceases to be party to the relevant contract, it has to bring into account any gain or loss calculated on the deemed disposal at the end of AP1 (S660/CTA09). The gain or loss is brought into account for the AP in which the company ceases to be a party to the contract (the movement in the value of the contract will, of course, have been taxed by bringing into account the movements in fair value for any intervening APs).
For details on loan relationships rules applying to OEICs, unit trusts or offshore funds, see CFM43000+.