CFM16775 - Taxing loan relationships: share-linked securities: taxing the holder: interaction with TCGA 1992

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

Consequent capital gains adjustments for the holder of a “contract for differences”

Where the derivative element of an asset linked security qualifies for chargeable gains treatment, FA02/SCH26/PARA45HZA prevents double counting of chargeable gains, or allowable losses, under both FA02/SCH26/PARA45A and the mainstream rules of TCGA92.

FA02/SCH26/PARA45HZA (2) adjusts the base cost of the security for the purposes of a subsequent disposal. It is treated as increased (or reduced) by the total of:

• the aggregate net chargeable gains (or allowable losses) already brought into account under FA02/SCH26/PARA45A in respect of the embedded derivative, and
• the “relevant Chapter 2 amount” (or for periods ending before 31 December 2006, the initial carrying value of the embedded derivative).

The “relevant Chapter 2 amount” is the amount by which the carrying value of the host contract at the date on which the contract for differences is disposed of exceeds the carrying value of that contract at the date on which the company became party to the security. This is similar to the adjustment made under PARA45H where a convertible security is “cashed out” ( CFM16686).