Part 7

Derivative contracts
Chapter 7

Chargeable gains arising in relation to derivative contracts

Issuers of securities with embedded derivatives: deemed options

Payment instead of disposal on exercise of deemed option
654
1
Subsection (2) applies if—
a
the option mentioned in section 652(3) is exercised at any time in the accounting period,
b
no shares are issued or transferred in fulfilment of the obligations under the option, and
c
an amount is paid in fulfilment of those obligations.
2
If —
a
CV exceeds X, a chargeable gain equal to the amount of the excess is treated as accruing to the company in the accounting period,
b
X exceeds CV, an allowable loss equal to the amount of the excess is treated as accruing to the company in the accounting period.
3
In this section—
- “CV” means—
  1. if the company was a party to the debtor relationship mentioned in section 652(2) at the time it was created, the tax-adjusted carrying value of the option at that time, or
  2. if the company became a party to that relationship at a later time, the tax-adjusted carrying value of the option at that time,
- “X” means the amount paid by the debtor in fulfilment of the obligations under the debtor relationship reduced (but not below nil) by the fair value of the host contract at the date on which the option is exercised, and
- “the host contract” means the loan relationship to which the company is treated as a party under section 415(2) (loan relationships with embedded derivatives) because of the debtor relationship.
Pt. 7 modified (with effect in accordance with s. 148 of the amending Act) by Finance Act 2012 (c. 14), s. 88(1)(2)(7) (with s. 147, Sch. 17)
Words in s. 654(3) substituted (with effect in accordance with Sch. 7 Pt. 6 of the amending Act) by Finance (No. 2) Act 2015 (c. 33), Sch. 7 para. 82
Pt. 7 modified by 2007 c. 3, s. 809FZZ(8) (as inserted (with effect in accordance with s. 37(4) of the amending Act) by Finance Act 2016 (c. 24), s. 37(2))
Pt. 7 modified (with effect in accordance with s. 1184(1) of the amending Act) by Corporation Tax Act 2010 (c. 4), ss. 601, 1184(1) (with Sch. 2)