Corporation Tax Act 2009 section 642

Exception from section 641

Section 642 provides an exception to the chargeable gains basis of taxation for certain embedded derivative contracts that qualify for the substantial shareholding exemption.

• Where an embedded derivative within a creditor relationship is an option (as covered by section 645), the normal chargeable gains treatment under section 641 may not apply
• The exception applies if the gain on a hypothetical disposal of the option would qualify for the substantial shareholding exemption under Schedule 7AC to TCGA 1992
• The test requires assuming the embedded derivative is a standalone option contract, disposed of at the end of the accounting period, producing a gain
• If the substantial shareholding exemption would apply to that hypothetical gain, the derivative contract falls outside the chargeable gains regime of section 641