The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) Regulations 2004

Exchange gains or losses arising from liabilities or assets hedging shares etc.U.K.

This section has no associated Explanatory Memorandum

3.—(1) For the purposes of section 84A(3A) of the Finance Act 1996 there is prescribed an exchange gain or loss arising to a company in an accounting period in relation to a liability representing a loan relationship of the company which is matched with the whole or part of any shares, ships or aircraft.

[F1(1ZA) But where the matched shares, ships or aircraft are matched after the company became party to the loan relationship, paragraph (1) only applies to a just and reasonable proportion of any exchange gain or loss having regard to—

(a)the fraction of the accounting period for which the shares, ships or aircraft are matched with the loan relationship,

(b)the fraction of the accounting period for which the company was party to the loan relationship, and

(c)fluctuations in exchange rates during the accounting period.]

[F2(1A) For the purposes of paragraph (1) a liability representing a loan relationship does not include any liability representing a relationship within section 100(1) of the Finance Act 1996.]

(2) This regulation does not apply if movements in the fair value [F3, or profits or losses arising on the disposal,] of any shares, ships or aircraft which are an asset falling within regulation 3(1) are brought into account by the company in computing, for the purposes of corporation tax, the profits of a trade carried on by it which consists of or includes dealing in shares, ships or aircraft.

[F4(3)  Shares, ships or aircraft are matched to the greatest possible extent with—

(a)

the liability representing the loan relationship designated as a hedge if condition 1 is satisfied;

(b)

subject to paragraph (a), the liability representing the loan relationship referred to in condition 2 if that condition is satisfied;]

F5...

Condition [F61]

The condition is that F7... the shares, ships or aircraft are a hedged item under a designated hedge of exchange rate risk in which the liability is the hedging instrument.

Condition [F82]

The condition is that the currency in which the liability is expressed is such that the company [F9intends], by entering into [F10[F11or] continuing to be subject to] that liability, F12... to eliminate or substantially reduce the economic risk of holding the asset, or part of the asset, which is attributable to fluctuations in exchange rates.

(4) If [F13condition 2] applies, a liability is matched with an asset only to the extent that the carrying value of the liability F14... does not exceed the unmatched carrying value of the asset at [F15the relevant time].

(5) For the purposes of section 84A(3A) of the Finance Act 1996 there is prescribed an exchange gain or loss arising to a company in an accounting period in relation to an asset representing a loan relationship of the company which is matched with the whole or part [F16of—

(a)any share capital of the company,

(b)in relation to a building society, any deferred shares issued by the building society to the extent that they are accounted for as equity instruments in accordance with generally accepted accounting practice, or

(c)[F17a regulatory capital security] issued by the company to the extent that it is accounted for as an equity instrument in accordance with generally accepted accounting practice.]

(6) An asset is matched with share capital [F18in particular where] for the accounting period of the company immediately preceding the first accounting period to which these Regulations apply—

(a)exchange gains and losses on the asset were taken to a reserve; and

(b)set off there against exchange gains and losses on the share capital.

(7) In this regulation—

“carrying value” means, in relation to a liability, the [F19relevant value] of that liability; and

“unmatched carrying value” means, in relation to an asset, an amount equal to the value as shown in the company’s accounts to the extent that that amount has not previously been matched in accordance with this regulation or regulation 4.

Textual Amendments

F7Words in reg. 3(3) omitted (6.12.2011 at 11.45 a.m. with effect in accordance with reg. 1(2) of the amending S.I.) by virtue of The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2011 (S.I. 2011/2912), regs. 1(1), 4(2)

F17Words in reg. 3(5)(c) substituted (1.1.2014 with effect in accordance with reg. 1(2)(3) of the amending S.I.) by virtue of The Taxation of Regulatory Capital Securities Regulations 2013 (S.I. 2013/3209), regs. 1(1), 10(3)

Commencement Information

I1Reg. 3 in force at 1.1.2005, see reg. 1(1)