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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Old rules: derivative contracts: underlying subject matter: ‘quasi equity’ derivatives

Changes in 2005 - Assets similar to shares

This guidance applies to periods of account beginning before 1 January 2005, or beginning after that date and ending before 16 March 2005

Units in a unit trust scheme were excluded before 16 March 2005 - see CFM50730 for treatment after that date. The value of such units derives from the value of the trust’s investment portfolio, in which shares are likely to feature prominently. (There is an exception if a company’s rights under a unit trust scheme are treated as a loan relationship because of FA96/SCH10/PARA4.)

Convertible securities which fell within FA96/S92 (see CFM82000 onwards) were also excluded. The value of such securities was, in part, dependent on the value of the shares into which they could be converted. Because of this, a company that held convertible securities that met all the tests in S92 was treated as having a chargeable gains asset rather than a loan relationship. It was therefore appropriate to treat derivatives over such convertible securities as CG assets rather than derivative contracts.

Similar considerations applied to securities that were linked to the value of chargeable assets. If a loan relationship, which was linked to the value of chargeable assets, fell within FA96/S93, it was an excluded subject matter for Para 4, Schedule 26.

However, FA96/S92 and FA96/S93 were repealed by FA 2004, with effect for accounting periods beginning on or after 1 January 2005. Thus the statutory exclusion of derivatives over ‘S92 securities’ or ‘S93 securities’ from Sch 26 was also repealed.