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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Derivative contracts: chargeable gains on derivatives: treatment of shares acquired under non-embedded derivatives (S667 & S668)

Rights to acquire shares

Where a company is a party to a derivative which is a plain vanilla contract and an option or future and a right to acquire shares is exercised or delivery is taken in the accounting period, then the option or the future is a derivative contract but the disposal of shares fall under TCGA. Where delivery of shares occurs under a future or forward contract, the base cost of the shares will be the amounts expended under the contract. Where an option is exercised, the acquisition of the option and its exercise are treated as a single transaction under TCGA92/S144(3), with the cost of the option being treated as part of the acquisition cost of the shares.

Without a special rule, profits or losses on the future or option that have already been taxed under the derivative contracts regimes could be brought into account again. That rule is provided by CTA09/S667 for options, and CTA09/S668 for futures. S667 and S668 apply for accounting periods ending on or after 30 December 2006. (Para 45HA was inserted by SI2006/3269.) For earlier periods (beginning after 1 January 2005), HMRC takes the view that the same tax consequences ensue, either as a result of TCGA92/S39 or on the general principle that taxation as income takes priority over capital gains.

Shares acquired on exercise of non-embedded option

CTA09/S667 applies where in an AP, a company is party to a derivative contract and

  • the contract is a plain vanilla contract (so not a hybrid)
  • the contract is an option
  • rights to acquire shares are comprised in the contract, and
  • shares are acquired as a result of the exercise of any of those rights in the AP.

Shares acquired on running of future to delivery

CTA09/S668 applies where in an AP, a company is party to a derivative contract and

  • the contract is a plain vanilla contract
  • the contract is a future, and
  • delivery is taken of shares in accordance with the terms of the future.

Tax consequences of sections 667 and 668

Where either section applies, the amount allowed as acquisition expenditure for the shares under TCGA92/S38(1)(a) is adjusted. Two amounts are computed: G is the sum of credits brought into account under the derivative contracts rules for the accounting period of disposal and all previous periods, while L is the corresponding amount of losses. If G exceeds L (i.e. a net profit has been taxed), the base cost of the shares is increased by the excess. If L exceeds G, the base cost is reduced by the net loss. If that would take the base cost below nil, the remaining adjustment is made by increasing the disposal consideration for the shares.