Section 589: Contracts excluded because of underlying subject matter: general
1568.This section, supplemented by the next four, provides that a relevant contract is not a derivative contract if its underlying subject matter falls wholly into certain categories (or is treated as doing so) and one or more conditions applies. It is based on paragraph 4(1), (2), (2ZA) and (4) of Schedule 26 to FA 2002.
1569.Profits and losses arising in relation to such contracts are therefore not brought into account under this Part but are taxed as appropriate under other provisions, primarily as chargeable gains.
1570.Subsection (1) introduces the term “excluded property” to describe underlying subject matter that causes the relevant contract not to be a derivative contract. Subsection (2), supplemented by subsections (3) to (6) defines the term, with further detail appearing in sections 590 to 592.
1571.Intangible fixed assets are excluded property, but only in the case of an option or future. Profits and losses in respect of such a contract are dealt with primarily under Part 8.
1572.The major categories of excluded property, in relation to any type of relevant contract, are (a) shares in a company and (b) rights of a unit holder under a unit trust scheme. But in such cases the relevant contract must both satisfy one of the conditions in section 591 and not have the characteristics of a commercial investment.
1573.Subsection (3) takes certain types of share out of the excluded category. These are:
shares dealt with by Chapter 7 of Part 6 (shares with guaranteed returns etc); and
shares in an open-ended investment company if that company fails to meet the qualifying investments test for the purposes of the loan relationships provisions.
1574.For more on the qualifying investments test, see the commentary on section 587.