Contracts which became derivative contracts on 16 March 2005
3547.This paragraph brings into account as a chargeable gain or allowable loss, when a company ceases to be a party to the contract, the gain or loss latent in a contract that became a derivative contract from 3.00pm on 16 March 2005 (the time at which the 2005 Budget announced proposed changes to the definition of what is a derivative contract). It is based on paragraph 4A(1), (2) and (3) of Schedule 26 to FA 2002.
3548.A contract that was not a derivative contract before that time but became one after that time is commonly one that formerly met the conditions for its underlying subject matter to be “excluded property” (see the commentary on section 589 (contracts excluded because of underlying subject matter: general)). The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment) Order 2005 (SI 2005/646) amended the conditions for that purpose from that time to cut down the range of excluded property (see the conditions in section 591 (conditions A to E mentioned in section 589(5))). Rather than covering most cases where the underlying subject matter of the contract is shares, either by themselves or in conjunction with holdings in shares, the excluded property rule now focuses on contracts used to hedge assets which are shares on which chargeable gains arise.
3549.The paragraph only applies if the contract was a “chargeable asset” immediately before it became a derivative contract (see the definition of that term in section 703).
3550.Sub-paragraph (5) requires a chargeable gain or allowable loss to be brought into account on the assumption the company disposed of the contract immediately before it became a derivative contract and did so for consideration equal to the book value of the contract (if any) at the end of the last accounting period of the company before that to which the changes made by SI 2005/646 apply.
3551.Paragraph (b) of sub-paragraph (6) defines that period. In the source legislation, the words used are “the company’s accounting period immediately before its first new period”. The term “new period” is not otherwise used in SI 2005/646. But a “new period” cannot predate the first period to which the amendments made by those regulations apply (as set out in article 1 of SI 2005/646). The paragraph has therefore been aligned with the commencement terms of SI 2005/646. See Change 106 in Annex 1.
