GIM9110 - Mutual insurance: tax treatment: accounting periods beginning on or after 1 October 2002: derivatives

The previous financial instrument (FI) legislation was replaced by FA02/SCH26 - derivative contracts - for accounting periods beginning on or after 1 October 2002, but the replacement legislation applies to mutual general insurers in much the same way as the FI legislation did. Where any financial instruments such as interest rate, currency and debt contacts are held by a mutual general insurer, profits or losses on the contract are treated as non-trading. They are given effect for tax purposes by being treated as non-trading credits and debits within the loan relationships legislation (CTA09 Part 5).

The scope of derivative contracts is wider potentially than that of the FI legislation: weather, credit and insurance derivative contracts are within the scope of the new rules, but not if they are contracts of insurance (FA02/SCH26/PARA12). The dividing line can often be thin in this area - but the accounting, and hence the tax treatment, may be very different. There is further discussion at GIM8270+.