The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment No. 2) Order 2005

Explanatory Note

(This note is not part of the Order)

This Order amends Schedule 26 (derivative contracts) to the Finance Act 2002 (c. 23).

Article 1 provides for the citation, commencement and effect of the Order.

Article 2 introduces the amendments to Part 2 of Schedule 26.

Article 3 amends paragraph 2(4) to correct the reference to the Schedule.

Article 4 amends paragraph 3 extending the types of relevant contracts which are treated as derivative contracts to contracts which are treated for accounting purposes as, or as forming part of, a financial asset or liability.

Article 5 amends paragraph 4 to extend the type of relevant contract which is excluded from being a derivative contract by virtue of its underlying subject matter.

Article 6 inserts two new paragraphs, 4B and 4C, which make transitional provisions in relation to relevant contracts which are chargeable assets but are not derivative contracts.

Article 7 amends paragraph 11 so that paragraph applies to the whole of Schedule 26 of the Finance Act 2002.

Article 8 amends paragraph 12 to include definitions of new terms.

Article 9 omits paragraph 21 of Schedule 26 which is redundant as a consequence of amendments made by Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment) Order 2005 (S.I. 2005/646).

Article 10 introduces the amendments to Part 9 which are made by articles 11 to 23. The effect of these amendments is to clarify the tax treatment in relation to host contracts and embedded derivatives primarily where the underlying subject matter is shares or rights of a unit holder under a unit trust scheme.

Article 11 makes consequential amendments to paragraph 44 (derivative contracts ceasing to be held for purposes of trade).

Article 12 amends paragraph 45C (derivative contracts relating to land or certain tangible movable property) to exclude derivative contracts which are within paragraph 45K (issuers of securities with embedded derivatives: deemed contracts for differences).

Article 13 amends paragraph 45D (embedded derivatives which are options) in relation to life assurance business and to exclude existing assets (i.e. an asset representing a creditor relationship of a company to which section 93 (convertible securities etc.: creditor relationships) of the Finance Act 1996 (c. 8) applied).

Article 14 amends paragraph 45E (exclusions from paragraph 45D) in consequence of the omission of paragraph 48A.

Article 15 amends paragraph 45F (creditor relationships: embedded derivative which are exactly tracking contracts for differences) to exclude existing assets (i.e. an asset representing a creditor relationship of a company to which section 93 (relationships linked to the value of chargeable assets) of the Finance Act 1996 (c. 8) applied).

Article 16 inserts a new paragraph 45FA to provide for the treatment of existing assets excluded from paragraphs 45D and 45F.

Article 17 inserts a new paragraph 45H to provide for the treatment of net gains and losses on the terminal exercise of an option comprised in a derivative contract and a new paragraph 45HA to provide for the treatment of credits and debits on the terminal exercise of an equity option.

Article 18 amends paragraph 45J (issuers of securities with embedded derivatives: deemed options) in relation to the treatment of deemed options.

Article 19 inserts a new paragraph 45JA to provide for the treatment of an issuer of convertible debt securities which are treated for accounting purposes as equity instruments.

Article 20 amends paragraph 45K (issuers of securities with embedded derivatives: deemed contracts for differences) to exclude existing liabilities owed by a company.

Article 21 amends paragraph 45L (derivatives not embedded in a loan relationship) to introduce an election for this paragraph not to apply.

Article 22 amends paragraph 45M (treatment of host contract as a loan relationship) to clarify the treatment of a host contract which is not itself a loan relationship.

Article 23 omits paragraph 48A (embedded derivatives in connected party loans) so embedded derivatives in connected party loans may be taxed on a chargeable gains basis.

This Order does not impose any new costs on business.