Corporation Tax Act 2009 section 635

Creditor relationships: embedded derivatives which are options

Section 635 requires life assurance companies to split out embedded derivative options from creditor relationships, even when those relationships are accounted for at fair value through profit or loss.

• Applies where a life assurance company holds a creditor relationship for its basic life assurance and general annuity business that contains an embedded derivative option
• Normally, accounting at fair value through profit or loss means the embedded derivative does not need to be separated from the host loan relationship
• This section overrides that accounting treatment and requires the company to bifurcate the creditor relationship into its loan relationship component and its embedded derivative component
• The bifurcation applies for the purposes of both the I minus E rules (used to tax life assurance companies) and the loan relationships rules in Part 5 of the Act