Derivative contracts—taxation on chargeable gains basis: holders
Derivative contracts—taxation on chargeable gains basis: holders

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

  • Derivative contracts—taxation on chargeable gains basis: holders
  • Derivative contracts taxed on a chargeable gains basis—creditor loan relationships with embedded derivatives
  • The embedded derivative—chargeable gains basis
  • The embedded derivative—relevant credits and relevant debits
  • The embedded derivative—tax relief: carry back of net losses
  • Special provisions—net gains and losses
  • Embedded options—net gains and losses
  • Embedded options—disposal of the security as a whole
  • Embedded options—disposal of the shares acquired on exercise
  • Embedded options—amounts G, L and CV
  • more

The profits and losses arising to a company from its derivative contracts are, like its profits and losses from its loan relationships, generally brought into account for the purposes of corporation tax as income.

There are, however, unlike under the loan relationships regime, a number of specific circumstances where this basic rule will not apply and the company's derivative contracts income, profits and gain, and losses, will instead be brought into account on a chargeable gains basis.

Nonetheless, the disapplication of the general rule (that derivative contracts profits and losses are taxed as income) does not necessarily mean that the derivative in question is excluded from the derivative contracts regime altogether. In particular, it does not necessarily mean:

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

  2. there needs to be a disposal (whether real or deemed) of the relevant derivative

The derivative contracts regime, instead, contains its own specialist chargeable gains provisions. The special rules which tax derivative contracts on a chargeable gains basis are set out in:

  1. Chapter 7 (Chargeable gains arising in relation to derivative contracts), and

  2. Chapter 8 (Further provision about chargeable gains and derivative contracts)

of Part 7 of the Corporation Tax Act 2009 (CTA 2009).

The chargeable gains basis rules, and the manner in which they apply, are broadly split between rules that