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HMRC internal manual

Corporate Finance Manual

Old rules: derivative contracts: transitional provisions: Para 4A

Equity derivatives coming into Sch 26 on 16 March 2005

Equity derivatives were brought into the derivative contracts regime on 16 March 2005, where the company’s period of account began on or after 1 January 2005 (and none of the exceptions apply - see CFM50730.) This means that some derivatives over shares (or unit trust units) moved from being chargeable gains assets to being derivative contracts.

FA02/SCH26/PARA4A provided that, where this is the case, the company is deemed to have disposed of the contract at 3 pm on 16 March 2005. The disposal is deemed to take place at the accounting value of the contract. The relevant accounting value is not, however, that at 16 March 2005 - it is the value at the end of the period of account immediately preceding the ‘new period’.

For example, suppose that a company had a period of account beginning on 1 February 2005. It held an equity derivative on 31 January 2005, and was still party to the contract on 16 March 2005. It is deemed to have disposed of the contract on 16 March, but at its book value on 31 January 2005.

The resultant chargeable gain or loss is brought into account when the company ceases to be a party to the contract. CFM83200 gives examples of how Para 4A operated.

For the purposes of Para 4A (and Paras 4B and 4C - see CFM83210), ‘chargeable gains asset’ included obligations under futures contracts to which TCGA92/S143 applies, as well as a contract that is an asset under the general principles of TCGA92/S21(1).