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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Derivative contracts: chargeable gains on derivatives: chargeable gains basis (S641)

Computation of chargeable gains or losses

CTA09/S641 sets out how you calculate the chargeable gain or allowable loss. There are three steps to computing the chargeable gain or loss:

  1. You compute the credits and debits which represent the company’s profits or losses on the derivative contract for the accounting period (in accordance with S595). This includes applying any special rules or anti-avoidance legislation where necessary. These are called ‘relevant credits’ and ‘relevant debits’.
  2. You then aggregate all the relevant credits for the accounting period to produce an overall credit, referred to as ‘C’, and similarly aggregate all the relevant debits, to get an amount ‘D’.
  3. If C exceeds D, the excess is a chargeable gain accruing to the company in the accounting period. If D exceeds C, the excess is an allowable loss.

There is no deemed disposal of an asset for the purposes of TCGA 1992 so any chargeable gain here is not reduced by indexation or any other form of capital gains relief.

Allowable losses arising on derivative contracts under CTA09/S641 can be carried back to a previous period - see CFM55040.

There are two exceptions to this general rule. The first relates to property-based return swaps within CTA09/S650, where only those credits or debits given by S659(3) are brought into account as capital gains or losses - see CFM55100.

Substantial shareholdings exemption

The second exception applies to some options over shares that are embedded within convertible securities (dealt with under S645). If - on the assumption that the embedded derivative were an actual option, and it was disposed of during the accounting period to give rise to a chargeable gain - the substantial shareholdings exemption (CG53000+) would apply to the gain, then following S642, any chargeable gain or allowable loss arrived at under S641 is not brought into account.

See example 2 at CFM55060.