Corporation Tax Act 2009 section 655

Ceasing to be party to debtor relationship when deemed option not exercised

Section 655 deals with the chargeable gains consequences when a company exits a debtor relationship that contains an embedded derivative (a deemed option) before that option has been exercised.

• If a company ceases to be a party to the debtor relationship while the deemed option remains unexercised, a notional acquisition and disposal of an asset is triggered for chargeable gains purposes.
• The company is treated as having acquired an asset for an amount equal to what it paid to exit the relationship (whether by redemption, repayment or other means), reduced by the fair value of the host contract at the date of exit — but not reduced below nil.
• The company is simultaneously treated as having disposed of that same asset for an amount equal to the carrying value of the relationship when it was acquired, also reduced by the fair value of the host contract at the time the option was originally acquired.
• The difference between the deemed acquisition cost and the deemed disposal proceeds may give rise to either a chargeable gain or an allowable loss.