Finance Act 2002

Issuers of securities with embedded derivatives: deemed options U.K.

[F1 45J. (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 debtor relationship of the company (“the original relationship”),]

(c) [F3 the derivative contract is treated by virtue of section 94A(3) of the Finance Act 1996] as an option,

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

(2) The additional conditions are—

(a) at the time when the company became party to the [F4 original] relationship—

(i) it was not carrying on a banking business or a business as a securities house, or

(ii) if it was carrying on such a business, it did not become party to the [F4 original] relationship in the ordinary course of that business,

F5 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(c) the underlying subject matter of the derivative contract is shares,

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

(3) Where this paragraph applies to a derivative contract for an accounting period—

(a) paragraph [F6 14(2) and (3) (trading and non-trading] credits and debits) shall not apply to the credits and debits given in relation to the contract for the accounting period by paragraph 15, but

(b) sub-paragraph (5), (7) or [F7 (9A)] (as the case may be) of this paragraph shall, subject to sub-paragraph (4), apply instead.

[F8 (4) If the company was a party to the [F9 original] relationship immediately before its first accounting period to begin on or after 1st January 2005—

(a) sub-paragraphs (5) and (9) do not apply, but

(b) where sub-paragraph (7) applies, E shall be taken to be nil and an allowable loss of an amount equal to F shall accordingly be treated as accruing to the company in the accounting period there mentioned.]

[F10 (4A) Sub-paragraph (5) applies if—

(a) the option mentioned in sub-paragraph (1)(c) is exercised at any time in an accounting period, and

(b) shares are issued or transferred in fulfilment of the obligations under the option (the “relevant disposal”).

(5) Where this sub-paragraph applies—

(a) section 144(2) of [F11 TCGA 1992] (exercise of options) applies to the relevant disposal as if the amount treated in accordance with section 94A(2) of the Finance Act 1996 as the carrying value of the option at the time the company became party to the loan relationship (the “initial carrying value”) was the consideration for the grant of the option;

(b) to the extent that it would otherwise apply, section 17(1) of the Taxation of Chargeable Gains Act 1992 (deemed market value consideration) does not apply to the relevant disposal.]

(6) Sub-paragraph (7) applies if—

(a) the option mentioned in sub-paragraph (1)(c) is exercised at any time in an accounting period,

(b) there is no relevant disposal, and

(c) an amount is paid in fulfilment of the obligations under the option.

(7) Where this sub-paragraph applies—

(a) if E exceeds F, a chargeable gain equal in amount to the amount of the excess shall be treated as accruing to the company in the accounting period,

(b) if F exceeds E, an allowable loss equal in amount to the amount of the excess shall be treated as accruing to the company in the accounting period,

[F12 (8) In sub-paragraph (7)—

• E is—

  (a)

  in a case where the company was a party to the original relationship at the time it was created, the initial carrying value of the option, and

  (b)

  in a case where the company became a party to the original relationship at a later time, the carrying value of the option at that time;

• F is the amount paid by the debtor in fulfilment of the obligations under the original relationship reduced (but not below nil) by the fair value of the loan-contract host contract at the date on which the option is exercised.

(9) Sub-paragraph (9A) applies if the company ceases to be a party to the original relationship at a time when the option mentioned in sub-paragraph (1)(c) has not been exercised.

(9A) The company is treated for the purposes of corporation tax on chargeable gains—

(a) as having disposed of an asset for a consideration equal to G, and

(b) as having acquired that asset for a consideration equal to H.

(9B) In sub-paragraph (9A)—

• G is—

  (a)

  in a case where the company was a party to the original relationship at the time it was created, the initial carrying value of the option, and

  (b)

  in a case where the company became a party to the original relationship at a later time, the carrying value of the option at that time;

• H is—

  (a)

  in a case where the company ceases to be a party to the original relationship as a result of the redemption or repayment of the liability representing the original relationship, the amount paid by the company, and

  (b)

  in any other case, the consideration given by the company on its ceasing to be party to the original relationship,

in either case reduced (but not below nil) by the fair value of the loan-contract host contract at the date on which it so ceases.]

(10) In this paragraph—

• “option” has the same meaning as in paragraph 12, apart from sub-paragraph (10);

• “securities house” means a person—

  (a)

  who is authorised for the purposes of the Financial Services and Markets Act 2000, and

  (b)

  whose business consists wholly or mainly of dealing as a principal in financial instruments within the meaning of [F13 section 984 of ITA 2007].]

Textual Amendments

F1 Sch. 26 paras. 45J-45L inserted (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 No. 2) Order 2004 (S.I. 2004/3270), arts. 1(1), 10

F2 Sch. 26 para. 45J(1)(a) substituted for Sch. 26 para. 45J(1)(a)(b) (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, 21(2)

F3 Words in Sch. 26 para. 45J(1)(c) 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, 21(3)

F4 Word in Sch. 26 para. 45J(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, 21(4)

F5 Sch. 26 para. 45J(2)(b) omitted (with effect in accordance with art. 1(2) of the amending S.I.) by virtue of The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment) Order 2005 (S.I. 2005/646), arts. 1(1), 16

F6 Words in Sch. 26 para. 45J(3)(a) substituted (with effect in accordance with art. 1(3) 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), 18(2)

F7 Word in Sch. 26 para. 45J(3)(b) 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, 21(5)

F8 Sch. 26 para. 45J(4) substituted (with effect in accordance with art. 1(3) 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), 18(3)

F9 Word in Sch. 26 para. 45J(4) 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, 21(4)

F10 Sch. 26 para. 45J(4A)(5) substituted for Sch. 26 para. 45J(5) (with effect in accordance with art. 1(3) 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), 18(4)

F11 Words in Sch. 26 para. 45J(5)(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, 30

F12 Sch. 26 paras. 45J(8)-(9B) substituted for Sch. 26 para. 45J(8)(9) (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, 21(6)

F13 Words in Sch. 26 para. 45J(10) substituted (6.4.2007) by Income Tax Act 2007 (c. 3), s. 1034(1), Sch. 1 para. 422(5) (with Sch. 2)