The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment) Order 2005 NO. 646

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STATUTORY INSTRUMENTS

2005 NO. 646
INCOME TAX
The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment) Order 2005

	Made	11 a.m. on 16th March 2005
	Laid before House of Commons	16th March 2005
	Coming into force	at 3.00 p.m. on 16th March 2005

The Treasury, in exercise of the powers conferred upon them by paragraph 13 of Schedule 26 to the Finance Act 2002[1] make the following Order:

Citation, commencement and effect
     1. - (1) This Order may be cited as the Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment) Order 2005 and shall come into force at 3.00 p.m. on 16th March 2005.

    (2) This Order has effect in relation to periods of account beginning on or after 1st January 2005 and ending on or after 16th March 2005.

Amendment of Part 2 of Schedule 26 to the Finance Act 2002
     2. Part 2 of Schedule 26 to the Finance Act 2002 is amended as follows.

     3. - (1) Amend paragraph 3 as follows.

    (2) In sub-paragraph (1) -

(3) In sub-paragraph (5) -

(b) after paragraph (a) insert -

     4. - (1) Amend paragraph 4 as follows.

    (2) Omit sub-paragraph (1A).

    (3) For sub-paragraph (2) substitute -

" (2) For the purposes of this paragraph the excluded types of property are -

(2A) The conditions specified in this sub-paragraph are -

(2B) The conditions specified in this sub-paragraph are -

(4) Omit sub-paragraphs (3) and (5).

5. After paragraph 4 insert -

" Contracts which become derivative contracts: chargeable assets

4A.

- (1) This paragraph applies to a company if the conditions in sub-paragraph (2) are satisfied in relation to a relevant contract.

(2) The conditions are -

(3) Where this paragraph applies, the company shall, when it ceases to be a party to the contract, bring into account, for the accounting period in which it ceased to be a party to the contract, the amount of any chargeable gain or allowable loss which would have been treated as accruing to the company on the assumption -

(4) For the purposes of this paragraph an asset is a chargeable asset if any gain accruing on the disposal of the asset by the company would be a chargeable gain for the purposes of the Taxation of Chargeable Gains Act 1992[2] (and includes any obligations under futures contracts which, by virtue of section 143 of that Act[3], are regarded as assets to the disposal of which that Act applies.".

     6. Omit paragraphs 5, 5A, 6, 7 and 8.

     7. - (1) Amend paragraph 9 as follows.

    (2) In sub-paragraph (2)(a) -

(a) for "(c) to (e)" substitute "(a) or (b)", and

(b) omit the words in parenthesis.

    (3) In sub-paragraph (4)(a) for "paragraphs (d) and (e)" substitute "paragraph (b)".

     8. Omit paragraph 10.

     9. - (1) Amend paragraph 12 as follows.

    (2) In sub-paragraph (1) -

(a) after paragraph (b) insert -

(b) after paragraph (c) insert -

(3) At the end add -

" (13) "Designated" has the same meaning as for accounting purposes.

(14) A company has a hedging relationship between a relevant contract on the one hand ("the hedging instrument") and an asset on the other ("the hedged item") if and to the extent that -

(15) "Integrated Prudential Sourcebook" means the Integrated Prudential Sourcebook made by the Financial Services Authority under the Financial Services and Markets Act 2000[4].

(16) "Long-term insurance fund" has the meaning given in section 431(2) of the Taxes Act 1988.".

Amendment of Part 8 of Schedule 26 to the Finance Act 2002
     10. Part 8 of Schedule 26 to the Finance Act 2002 is amended as follows.

     11. Omit paragraph 42(4).

     12. Omit paragraph 43.

Amendment of Part 9 of Schedule 26 to the Finance Act 2002
     13. Part 9 of Schedule 26 to the Finance Act 2002 is amended as follows.

     14. - (1) Amend paragraph 45(1)(a) as follows.

    (2) In sub-paragraph (i) after "company" insert "or".

    (3) In sub-paragraph (ii) omit "or".

    (4) Omit sub-paragraph (iii).

     15. Omit paragraph 45F(2)(b).

     16. Omit paragraph 45J(2)(b).

     17. Omit paragraph 45K(2)(b).

     18. After paragraph 45L insert -

" Treatment of host contract as a loan relationship

45M.

- (1) This paragraph applies where -

(2) Where this paragraph applies -

(3) For the purposes of this paragraph a "zero coupon bond" is a security -

(4) Paragraph 9 applies for the purpose of determining whether the underlying subject matter is to be treated as consisting wholly of property referred to in sub-paragraph (1)(c).".

19. In paragraph 46(2)(a) for "(c) to (f)" substitute "(a) and (b)".

20. Omit paragraph 48.

Jim Murphy

Nick Ainger
Two of the Lords Commissioners of Her Majesty's Treasury

16th March 2005

EXPLANATORY NOTE

(This note is not part of the Order)

This Order amends Parts 2, 8 and 9 of Schedule 26 (derivative contracts) to the Finance Act 2002 (c. 23).

Article 1 provides for the citation, commencement and effect of the Order.

Article 2 introduces the amendments to Part 2 which are made by articles 3 to 9. The effect of these amendments is to restrict the cases of relevant contract whose underlying subject matter is of shares or rights of a unit holder under a unit trust scheme which are prevented from being derivative contracts. A transitional provision is introduced in relation to contracts which become derivative contracts in consequence of this Order.

Article 10 introduces the amendments made to Part 8 which are consequential amendments made by articles 11 and 12.

Article 13 introduces the amendments to Part 9 which are made by articles 14 to 20. These make consequential amendments and insert a new provision to clarify the tax treatment in relation to host contracts and embedded derivatives where the underlying subject matter is of shares or rights of a unit holder under a unit trust scheme.

This Order does impose new costs on business and is expected to have significant Exchequer impact by closing avoidance schemes that would otherwise have cost substantial amounts in terms of tax yield and by protecting revenues in the future.

Notes:

[1] 2002 c. 23, paragraph 13 is amended by paragraph 2 of Schedule 9 to the Finance Act 2004 (c. 12).back

[2] 1992 c. 12.back

[3] Section 143 was amended by section 95 of, and Part V(9) of Schedule 26 to, the Finance Act 1994 (c. 9) and articles 61 and 64 of S.I. 2001/3629.back

[4] 2000 c. 8.back

ISBN 0 11 072595 6

Prepared 7 April 2005

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You are here: BAILII >> Databases >> United Kingdom Statutory Instruments >> The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment) Order 2005 NO. 646 URL: https://www.bailii.org/uk/legis/num_reg/2005/20050646.html