Corporation Tax Act 2009 section 670

Treatment of net gains and losses on exercise of option

Section 670 adjusts the chargeable gains calculation when a company disposes of shares acquired by exercising options embedded in a creditor relationship, or disposes of the asset representing that creditor relationship, to prevent double taxation of amounts already taxed as chargeable gains or allowable losses under the derivative contract rules.

• When an embedded option in a creditor relationship (within section 645) is exercised or disposed of, the acquisition cost used in the chargeable gains calculation on a subsequent disposal of the underlying asset or the acquired shares is adjusted by reference to the net gains and losses (G, L and CV as defined in section 671) already recognised under the derivative contract rules.
• If the combined total of G (gains) and CV (carrying value) exceeds L (losses), the allowable acquisition cost is increased by that excess; if L exceeds the combined total of G and CV, the allowable acquisition cost is reduced by that excess.
• Where the required reduction exceeds the amount of expenditure otherwise allowable as acquisition cost, the unrelieved excess is instead added to the disposal consideration, ensuring the full adjustment is reflected in the chargeable gains computation.
• The normal TCGA rules that strip out consideration and expenditure already accounted for in an income computation (sections 37 and 39 of TCGA 1992) are disapplied for disposals covered by this section.