The Finance Act 2002, Schedule 26 (Parts 2 and 9) (Amendment No. 3) Order 2005

Explanatory Note

(This note is not part of the Order)

This Order further amends Parts 2 and 9 of Schedule 26 to the Finance Act 2002, which deals with the taxation of derivative contracts.

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

Article 2 introduces the amendments to Schedule 26.

Article 3 introduces the amendments to Part 2.

Article 4 makes a drafting amendment to provide a definition of “embedded derivative contract”.

Article 5 amends paragraph 4 of Schedule 26 extending the scope of the concept of excluded types of property. Contracts whose subject matter consists wholly of one or more of the excluded types of property are not derivative contracts for the purposes of Schedule 26.

Article 6 makes amendments to paragraph12 (which defines terms related to derivative contracts for the purposes of the Schedule), extending the concept of a hedging relationship to include a relationship between a relevant contract and a liability of the company (including its own share capital).

Article 7 introduces the amendments to Part 9.

Article 8 amends paragraph 45C (derivative contracts relating to land or certain tangible movable property) extending its application to derivatives which would fall within paragraph 45F but for sub-paragraph (2)(f) of that paragraph or within paragraph 45K but for sub-paragraph (2)(e) of that paragraph.

Article 9 extends the scope of paragraph 45H (treatment of net gains and losses on terminal exercise of an option) to cover cases where rights treated as comprised in the derivative are (to any extent) disposed of. It also clarifies the effect of the interaction between the paragraph and section 127 of the Taxation of Chargeable Gains Act 1992 (which deems a disposal not to occur on the restructuring of a company).

Article 10 corrects a cross-reference in paragraph 45HA.

Article 11 makes an amendment to the definition of F in paragraph 45J(8) to make it clear that references to amounts paid in fulfilment of the obligations under a debtor relationship are to amounts paid by the debtor

Article 12 amends paragraph 45L. Paragraphs (2) and (3) of Article 12 make amendments clarifying the scope of paragraph 45L. Paragraph (4) amends sub-paragraph (2A) of paragraph 45L, preventing elections that the paragraph is not to apply in the case of contracts of long-term insurance or of an embedded derivative contract whose underlying subject-matter is commodities.

Article 13 inserts paragraph 45LA which contains further provisions about elections under paragraph 45L(2A).

Article 14 makes an amendment to paragraph 45M(1) consequential on the introduction of the concept of an “embedded derivative contract”.

Article 15 makes consequential amendments to the paragraph 54(1) which contains definitions applying for the purposes of the Schedule, inserting definitions of “embedded derivative contract” and “open-ended investment company”.

These Regulations do not impose new costs on business.