Finance Act 2002

Creditor relationships: embedded derivatives which are options U.K.

[F1 45D. (1) This paragraph applies to a derivative contract of a company for an accounting period if the following conditions are satisfied—

[F2 (a) the derivative contract is a loan-contract embedded derivative to which the company is treated as party by virtue of a creditor relationship of the company (“the original relationship”),

(b) the derivative contract is treated as an option by virtue of section 94A(3) of the Finance Act 1996,]

(d) the additional conditions in sub-paragraph (2) are satisfied.

(2) The additional conditions are—

(a) the company is not party to the [F3 original relationship] at any time in the accounting period for the purposes of a trade carried on by it (but see sub-paragraph (3)),

F4 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(c) the underlying subject matter of the derivative contract—

(i) is qualifying ordinary shares (see sub-paragraph (4)), or

(ii) is mandatorily convertible preference shares (see sub-paragraph (4)),

(d) the company is not a body falling within paragraph 45C(3) (authorised unit trusts etc),

(e) this paragraph is not prevented from applying to the derivative contract for the accounting period by paragraph 45E.

[F5 (f) the original asset is not an existing asset.]

(3) The condition in sub-paragraph (2)(a) does not apply if the company—

(a) is party to the [F6 original relationship] for the purposes of life assurance business, or

(b) is a mutual trading company.

[F7 (3A) Where in any accounting period—

(a) a company is party to a creditor relationship for the purposes of its life assurance business, and

(b) that creditor relationship is one in relation to which section 94A of the Finance Act 1996 would have effect but for the fact that the company accounts for the creditor relationship at fair value through profit and loss,

this [F8 Schedule and Chapter 2 of Part 4 of the Finance Act 1996] shall have effect for that accounting period as it would if the creditor relationship were one in relation to which that section has effect.]

(4) In this paragraph—

• [F9 “existing asset” means an asset in relation to which paragraph 9(2) of Schedule 10 to the Finance Act 2004 has effect;]

• “mandatorily convertible preference shares” means shares—

  (a)

  which represent the creditor relationship,

  (b)

  which are not qualifying ordinary shares, and

  (c)

  which are issued upon terms that stipulate that they must be converted into, or exchanged for, qualifying ordinary shares by a relevant time,

  and for this purpose “relevant time” means a time no more than 24 hours after the acquisition of the shares by a person who, immediately before that acquisition, had the creditor relationship;

• “qualifying ordinary shares” means shares in a company (the “relevant company”) which satisfy the Conditions in sub-paragraphs (5) and (6).

(5) Condition 1 is that the shares are shares representing some or all of the issued share capital (by whatever name called) of the relevant company, other than—

(a) capital the holders of which have a right to a dividend at a fixed rate but have no other right to share in the profits of that company, or

(b) capital the holders of which have no right to a dividend of any description nor any other right to share in the profits of that company.

(6) Condition 2 is that the shares—

(a) are listed on a recognised stock exchange, or

(b) are shares in a holding company or a trading company.

(7) In sub-paragraph (6) [F10 “holding company” and “trading company” have the same meaning as in section 165 of TCGA 1992 (see section 165A of that Act).]

[F11 (8) The [F12 original relationship] shall not be treated as a qualifying corporate bond by virtue of section 117(A1) of [F13 TCGA 1992].]

[F14 (9) See also paragraph 45H (treatment of gains and losses on terminal exercise of option).]]

Textual Amendments

F1 Sch. 26 paras. 45A-45I inserted (with effect in accordance with art. 1(2)(3)(4) of the amending S.I.) by The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment) Order 2004 (S.I. 2004/2201), arts. 1(1), 15

F2 Sch. 26 para. 45D(1)(a)(b) substituted for Sch. 26 para. 45D(1)(a)-(c) (with effect in accordance with art. 1(2) of the amending S.I.) by The Finance Act 2002, Schedule 26, (Parts 2 and 9) (Amendment) Order 2006 (S.I. 2006/3269), arts. 1, 13(2)

F3 Words in Sch. 26 para. 45D(2)(a) substituted (with effect in accordance with art. 1(2) of the amending S.I.) by The Finance Act 2002, Schedule 26, (Parts 2 and 9) (Amendment) Order 2006 (S.I. 2006/3269), arts. 1, 13(3)

F4 Sch. 26 para. 45D(2)(b) omitted (with effect in accordance with art. 1(4) of the amending S.I.) by virtue of The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment No. 2) Order 2005 (S.I. 2005/2082), arts. 1(2), 13(2)(a)

F5 Sch. 26 para. 45D(2)(f) substituted (with effect in accordance with art. 1(2) of the amending S.I.) by The Finance Act 2002, Schedule 26, (Parts 2 and 9) (Amendment) Order 2006 (S.I. 2006/3269), arts. 1, 13(4)

F6 Words in Sch. 26 para. 45D(3)(a) substituted (with effect in accordance with art. 1(2) of the amending S.I.) by The Finance Act 2002, Schedule 26, (Parts 2 and 9) (Amendment) Order 2006 (S.I. 2006/3269), arts. 1, 13(5)

F7 Sch. 26 para. 45D(3A) inserted (with effect in accordance with art. 1(4) of the amending S.I.) by The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment No. 2) Order 2005 (S.I. 2005/2082), arts. 1(2), 13(3)

F8 Words in Sch. 26 para. 45D(3A) substituted (with effect in accordance with art. 1(2) of the amending S.I.) by The Finance Act 2002, Schedule 26, (Parts 2 and 9) (Amendment) Order 2006 (S.I. 2006/3269), arts. 1, 13(6)

F9 Words in Sch. 26 para. 45D(4) inserted (with effect in accordance with art. 1(4) of the amending S.I.) by The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment No. 2) Order 2005 (S.I. 2005/2082), arts. 1(2), 13(4)

F10 Words in Sch. 26 para. 45D(7) substituted (with effect in accordance with Sch. 2 para. 56(3) of the amending Act) by Finance Act 2008 (c. 9), Sch. 2 para. 51

F11 Sch. 26 para. 45D(8) substituted (with effect in accordance with art. 1(4) of the amending S.I.) by The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment No. 2) Order 2005 (S.I. 2005/2082), arts. 1(2), 13(5)

F12 Words in Sch. 26 para. 45D(8) substituted (with effect in accordance with art. 1(2) of the amending S.I.) by The Finance Act 2002, Schedule 26, (Parts 2 and 9) (Amendment) Order 2006 (S.I. 2006/3269), arts. 1, 13(7)

F13 Words in Sch. 26 para. 45D(8) substituted (with effect in accordance with art. 1(2) of the amending S.I.) by The Finance Act 2002, Schedule 26, (Parts 2 and 9) (Amendment) Order 2006 (S.I. 2006/3269), arts. 1, 30

F14 Sch. 26 para. 45D(9) inserted (with effect in accordance with art. 1(4) of the amending S.I.) by The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment No. 2) Order 2005 (S.I. 2005/2082), arts. 1(2), 13(6)