CFM16755 - Taxing loan relationships: share-linked securities: taxing the holder: conditions for chargeable gains treatment

This guidance applies to periods of account beginning on or after 1 January 2005

Chargeable gains treatment: FA02/SCH26/PARA45F

For the embedded contract for differences to qualify for chargeable gains treatment under FA02/SCH26/PARA45A, all the following conditions must be met.

Conditions relating to the company

The company must not be:

• a company which is a party to the security for the purposes of its trade (other than an insurance business or a mutual trade), or
• an Authorised Unit Trust, Investment Trust, Open Ended Investment Company or Venture Capital Trust (these concerns are exempt from tax on chargeable gains).

Conditions relating to the security

It must not be an “existing asset”, meaning one entered into before the beginning of the first period of account to begin on or after 1 January 2005, and which was earlier within FA96/S93.

Conditions relating to the embedded derivative

• The asset(s), or index of assets to whose value the security is linked must be qualifying ordinary shares listed on a recognised stock exchange.
• The contract for differences must be an “exactly tracking“ contract ( CFM16760).

For periods beginning on or after 1 January 2005 and ending before 16 March 2005, capital gains treatment was also denied where the option was one to which any of FA02/SCH26/PARAS 6 to 8 applied. These paragraphs were repealed for accounting periods ending on or after 16 March 2005.

For periods ending on or before 30 December 2006 land was also a qualifying asset, so that a property derivative might potentially fall within both PARA45F and PARA45C. See CFM13534 for more on land derivatives.

Meaning of “qualifying ordinary shares” FA02/SCH26/PARA45F (7)

These are shares in a company which represent some or all of its issued share capital, other than shares carrying:

• the right to a fixed rate dividend but no other right, or
• no right to a dividend of any description, nor any other right to share in the profits of the relevant company.

Status of the security for TCGA1992

Where the derivative meets all the above conditions, FA02/SCH26/PARA45F (8) provides that the creditor relationship is not treated as a qualifying corporate bond for the purposes of TCGA1992. This ensures that debits and credits treated as chargeable gains, or allowable losses, under FA02/SCH26PARA45A are not exempt gains.