CFM62950 - Foreign exchange: matching: derivative contracts used to hedge share transactions: bringing amounts back into account

EGLBAGL (S.I. 2002/1970) REGS 3 and 5

Where there has been a disposal of shares by a company in respect of which amounts have been disregarded by the company under REG 5ZA, the disregarded amounts may be brought into account on disposal of the shares. This will be the subscribed shares in the case of hedging under REG 5ZA(2)(a)(iii) (see CFM62920).

It is expected that in many cases, the substantial shareholdings exemption (TCGA92/SCH7AC) or the QAHC rules (FA22/SCH2/PARA14) will apply to the chargeable gain or allowable loss on disposal, in which case adjustments that arise under the EGLBAGL Regulations also fall outside the scope of tax.

EGLBAGL REG 5(3A) and (3B)

Where the relevant hedging relationship under REG 5ZA concerned a relevant dividend or creditor relationship there are particular rules within the EGLBAGL Regulations.

Amounts which relate to the hedging of a relevant dividend will not be brought into account under the EGLBAGL Regulations, except to the extent that the dividend is reflected in the chargeable gains calculation under the chargeable gains rules for value shifting (TCGA/S31) or depreciatory transactions (TCGA92/S176).

Amounts which relate to the hedging of a creditor relationship will also not be brought into account.

Share transactions that do not complete

If a derivative contract is entered into to hedge the economic risk in relation to a forecast transaction or firm commitment in relation to an anticipated future disposal of shares, and the proposed disposal falls through, any relevant amounts arising on the derivative contract should still be disregarded under REG 5ZA. On an eventual disposal of these shares, the disregarded amounts should be brought back into account, unless exemptions apply.

Any disregarded amounts in relation to an anticipated share acquisition that does not complete do not need to be brought back into account because the company with the relevant hedging relationship will not own the shares, and therefore will never dispose of the shares.