Income Tax Act 2007 section 809FZG

Derivatives

Section 809FZG sets out how derivative contracts held by investment schemes are treated as investments for the purposes of the carried interest rules, including how to determine the value invested and what constitutes a disposal.

• A derivative contract entered into for the purposes of an investment scheme counts as an investment, with its value determined differently depending on whether it is an option (cost of acquisition), a future (contract price for the underlying subject matter), or a contract for differences (notional principal)
• Where entering into a derivative contract triggers a deemed disposal of an existing investment, the derivative itself is not treated as a separate investment — but if the derivative is later disposed of without disposing of the underlying investment, a new investment is created to the extent the scheme regains material exposure to the risks and rewards of that underlying investment
• Disposal of a derivative contract includes expiry, termination, loss or cancellation of rights, substantial variation of rights, and (for options) exercise of the option — but does not include renewal with the same counterparty on substantially the same terms
• A substantial variation of a derivative contract's terms is treated as both a disposal of the original contract and the making of a new investment consisting of the contract as varied