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HMRC internal manual

General Insurance Manual

Taxation of the investment return: derivative contracts: accounting periods beginning on or after 1 October 2002

The financial instruments legislation was replaced by FA02/SCH26 - derivative contracts - for accounting periods beginning on or after 1 October 2002. The legislation applies to general insurance business of proprietary companies in much the same way as to other companies, but there are particular rules dealing with:

  • Exchange gains and losses on (for example) currency contracts falling within the Schedule.
  • Share derivatives, which are within the scope of the legislation for general insurers along with other financial traders - FA02/SCH26/PARA5. If derivative contracts over shares are marked to market, that accounting method must be followed for tax even if the contracts hedge an asset to which the realisations basis continues to apply as a result of an election under FA02/S66.
  • Weather, credit and insurance derivative contracts, which are within the scope of the rules, unless they are contracts of insurance - FA02/SCH26/PARA12 (5). The dividing line can often be thin in this area - but the accounting, and hence the tax treatment may be very different.