Annex 1: Minor Changes in the Law Change 64: Derivative contracts: amendment of a condition to be satisfied to determine whether the underlying subject matter of a relevant contract is “excluded property” for the purposes of Part 7: section 591
This change adds acquiring a plain vanilla contract to the circumstances that are relevant to the contract satisfying condition A in section 591. The circumstances in question are those in which a company carrying on life assurance business becomes a party to such a contract.
Paragraph 3 of Schedule 26 to FA 2002 sets out conditions to be satisfied if a relevant contract is to be a derivative contract for the purposes of that Schedule. (“Relevant contract” is defined in paragraph 2(2) of that Schedule as an option, a future or a contract for differences.) But paragraph 4 of Schedule 26 to FA 2002 excludes a relevant contract from contracts that are derivative contracts for the purposes of that Schedule if, although the relevant contract meets the conditions in paragraph 3 of that Schedule, its underlying subject matter consists wholly of property within specified excluded types of property. One such type is certain shares in a company or rights of a unit holder under a unit trust scheme, if the relevant contract satisfies a condition in paragraph 4(2A), (2B), (2C), (2CA) or (2D) of Schedule 26 to FA 2002.
The condition in paragraph 4(2A) of Schedule 26 to FA 2002 includes that the relevant contract is a plain vanilla contract “entered into” by a company carrying on life assurance business. (A “plain vanilla contract” is defined in paragraph 2(2B) of Schedule 26 to FA 2002 as a relevant contract other than one to which the company is treated as being a party by virtue of a provision mentioned in paragraph 2(2A) of that Schedule.) But the conditions in paragraph 4(2B), (2C) and (2CA) of Schedule 26 to FA 2002 refer to the circumstance in which the relevant contract is “entered into or acquired”. That is, the condition can be met in circumstances where the company in question was not a party to the contract when it was made but became a party to the contract at a later point, say by the assignment to it of the assignor’s rights and liabilities under the contract.
There is no reason in relation to the condition in paragraph 4(2A) of Schedule 26 to FA 2002 to distinguish between a case in which a company enters into a contract and one in which it acquires the contract. It is not HMRC’s practice to make any such distinction. Section 591(2), which rewrites paragraph 4(2A) of Schedule 26 to FA 2002, therefore refers to a plain vanilla contract “entered into or acquired” by a company carrying on life assurance business. This brings it into line with the conditions in paragraph 4(2B), (2C) and (2CA) of Schedule 26 to FA 2002 that are also rewritten in section 591.
Because of this change some relevant contracts may cease to be derivative contracts for the purposes of this Part, in which case profits and losses from the contract are not charged by virtue of this Part and may be subject to a more favourable regime (say, the charge on chargeable gains).
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.