CFM85050 - Old rules: derivative contracts: transition to FA02 SCH 26: contracts that were chargeable assets.

Contracts that were chargeable assets

Certain types of derivative were not qualifying contracts under the FA 1994 rules, but were within the capital gains code, either because they were options which are chargeable assets under general principles, or because they were commodity or financial futures or options brought into CG by TCGA92/S143.

Some contracts of this type will also be outside of the scope of FA02/SCH26. Examples include

  • futures which have shares as their only underlying subject matter (and do not fall within any of the qualified exclusions of Paras 5 to 8, Sch 26), and
  • options to purchase land.

Some of these contracts, however, are brought in to the FA 2002 rules. Commodity futures and options are likely to be the main sorts of contract in this category.

Where the contract

  • was previously a chargeable asset (including contracts within TCGA92/S143), but
  • is now taxed and relieved as a derivative contract

it is necessary to calculate a held over gain or loss.

This gain or loss is brought into account as a chargeable gain or allowable loss in the accounting period in which the company ceases to be a party to the contract. Where there is a pre- commencement loss, however, the company can elect for the loss to be relieved as a non-trading loan relationship debit. Again, the relief is given in the accounting period in which the company ceases to be a party to the contract. The election under FA02/SCH28/PARA4(7) must be made within 2 years of the end of this accounting period.

The held over gain or loss is computed by deeming the company to dispose of the asset immediately before its commencement day. Para 4(5b) takes the deemed consideration for the contract to be equal to its closing value in the accounts for the final period in which it is treated as a chargeable asset.