Taxation of derivatives—chargeable gains basis rules

The following Tax practice note provides comprehensive and up to date legal information covering:

  • Taxation of derivatives—chargeable gains basis rules
  • ‘Annual chargeable gains’—derivatives relating to land or certain tangible moveable property
  • ‘Annual chargeable gains’—property based total return swaps
  • ‘Annual chargeable gains’—derivatives embedded in creditor relationships
  • Ability to carry back net losses for derivatives subject to ‘annual chargeable gains’
  • Derivatives embedded in debtor relationships
  • Embedded options (non-standard convertibles and exchangeables)
  • Embedded options—option exercised and shares issued or transferred
  • Embedded options—option exercised but cash-settled
  • Embedded options—option lapses without being exercised
  • More...

Taxation of derivatives—chargeable gains basis rules

The general rule is that the profits and losses arising to a company from its derivative contracts are (like the profits and losses from its loan relationships) brought into account for corporation tax purposes as income under the derivative contracts rules in Part 7 of the Corporation Tax Act 2009 (CTA 2009).

There are, however, a number of specific circumstances where this general rule is disapplied and, instead, profits and losses on a company's derivative contracts are brought into account on a chargeable gains basis.

This Practice Note looks at the specific circumstances where this is the case and, where it is, how the rules apply to bring profits and gains into account for corporation tax purposes. For the more general rules governing the taxation of derivative contracts, see Practice Note: Taxation of derivatives—the main rules.

It should be noted at the outset that, where profits and losses on a company’s derivative contracts are taxed on the chargeable gains basis, this does not necessarily mean that:

  1. the normal principles for calculating corporation tax on chargeable gains are applicable, or

  2. there is an actual or deemed disposal in relation to the relevant derivative contract

Rather, the derivative contracts regime contains its own specialist chargeable gains provisions within Part 7 of CTA 2009. These are found within Chapters 7 and 8 of that Part.

Broadly speaking,

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