CFM13104 - Taxing derivative contracts: underlying subject matter: shares

Underlying subject matter - shares

Share is defined in FA02/SCH26/PARA12(12), in relation to any company, as any share in the company under which an entitlement to receive distributions may arise.

Distribution is not specifically defined in Sch 26 and therefore takes its meaning from ICTA88/S832(1) - so you need to look primarily at ICTA88/S209 to find out what is a distribution. Fixed-rate preference shares, for example, give an entitlement to receive distributions and are therefore an excluded subject matter. On the other hand, shares which only give the holder a right to receive capital distributions in a winding-up will not be excluded. This is because ICTA88/S209(1) says that such capital distributions are not distributions for the purposes of the Taxes Acts.

A building society share is not a share for the purposes of Sch 26. This is because ICTA88/S477(3) says that dividends or interest payable on a building society share are not distributions - so no "entitlement to distributions" can arise on such shares.

The definition of “share” is extended for periods of account beginning on or after 1 January 2005 and ending on or after 16 March 2005. For such periods:

• Where a company has no share capital (for example, a company limited by guarantee), it includes any interests in the company possessed by members of the company.
• It also includes a depositary receipt for shares. A depositary receipt is a certificate that represents ownership of a certain number of shares, and which in many cases can be traded independently of the shares.

Treatment before 16 March 2005

Shares are not an excluded subject matter if the relevant contract is held for the purposes of a trade (see CFM13131). Nor is an embedded derivative, which is treated as a relevant contract by FA96/S94A(2)(b) (see CFM13074), prevented from being a derivative contract by having shares as its subject matter. There are also certain other circumstances in which shares are not an excluded USM - CFM13122 summarises these, and CFM13130 onwards give details.

See examples at CFM13104a

Treatment after 16 March 2005

The general exclusion of shares as an underlying subject matter was removed by SI 2005/646, with effect from 16 March 2005. More detailed guidance is at CFM13108.