Existing assets representing creditor relationships: options
3532.This paragraph, supplemented by the next two, disapplies section 574 (non-trading credits and debits to be brought into account under Part 5) in respect of a derivative contract and modifies the application of TCGA in respect of the “original creditor relationship” mentioned in section 645 (creditor relationships: embedded derivatives which are options), if that section would have applied to the derivative contract but for the disapplication in the preceding paragraph. This paragraph is based on paragraphs 12(11C) and (11D), 45A(2) and 45FA(1), (3), (4), (6) and (8) of Schedule 26 to FA 2002.
3533.Sub-paragraph (2) disapplies section 574 in respect of the “relevant credits and debits” arising on the option. Any gain or loss on the exercise or abandonment of the option is dealt with under the provisions of TCGA, as those provisions apply to the creditor relationship. “Relevant credits and debits” are defined in section 659.
3534.The first modification of TCGA in respect of the original creditor relationship, in sub-paragraph (3), is the same as that made by section 645(8). The creditor relationship is not treated as a “qualifying corporate bond” although section 117(A1) of TCGA would otherwise treat it as such.
3535.The second modification, in sub-paragraph (4), is to the amount or value of the consideration applicable to the asset representing the creditor relationship on a disposal of that asset. So much of any interest in respect of the creditor relationship as is brought into account under Part 5 (loan relationships) but, because of the terms of the disposal, is not paid or payable to the company to which it accrues, is deducted from the consideration. In effect, the charge under that Part is given priority over the charge to corporation tax on chargeable gains.
3536.The third modification, in sub-paragraph (6), also affects the amount of that consideration. It adjusts that amount for any “relevant exchange gains” and “relevant exchange losses”, as those terms are defined in the paragraph below. The consideration is first increased by any such losses and then reduced by any such gains. If that reduction would exceed the amount of the consideration, that amount becomes nil and, under sub-paragraph (7), the excess is added to incidental costs of acquisition under section 38 of TCGA.
3537.The definition of “relevant exchange gains” and “relevant exchange losses” refers to such gains and losses in respect of the asset representing the creditor relationship as are brought into account under Part 5 (loan relationships) for an accounting period throughout which the company holds the asset. Gains and losses are apportioned as necessary if the company only holds the asset for part of an accounting period. The effect of the adjustments to the consideration is to reverse the application of that Part to exchange gains and losses in respect of the asset in question so that those exchange adjustments are taken into account only in the chargeable gains arising in respect of the asset representing the creditor relationship.
3538.The second of these paragraphs provides definitions for the purposes of the first paragraph. It is based on paragraphs 12(11C) and 45FA(7) of Schedule 26 to FA 2002.
3539.The third of these paragraphs provides for the meaning in the first paragraph of the asset representing the creditor relationship if there has been a reorganisation of share capital. It is based on paragraphs 12(11C) and 45FA(5) of Schedule 26 to FA 2002.
