Section 670 | Treatment of net gains and losses on exercise of option

(1)This section applies if—

(a)a derivative contract is one to which section 645 (creditor relationships: embedded derivatives which are options) applies for an accounting period,

(b)rights to acquire shares fall to be treated as comprised in the derivative contract because of section 585(2), and

(c)any of those rights are exercised or otherwise disposed of in the accounting period.

(2)Subsection (3) applies if there is a disposal of the asset representing the creditor relationship mentioned in section 645(2).

(3)For the purpose of calculating any chargeable gain accruing to the company on the disposal, the sums allowable as a deduction under section 38(1)(a) of TCGA 1992 (acquisition costs) are—

(a)if the sum of G and CV exceeds L, increased by the amount of that excess,

(b)if L exceeds the sum of G and CV, reduced by the amount of that excess.

(4)Subsection (5) applies if there is a disposal of all or any of the shares (“the relevant shares”) acquired—

(a)as a result of the exercise of rights mentioned in subsection (1)(c), and

(b)in circumstances where a disposal is deemed not to occur because of section 127 of TCGA 1992 (equation of original shares and new holding).

(5)For the purpose of calculating any chargeable gain accruing to the company on a disposal of all the relevant shares, the sums allowable as a deduction under section 38(1)(a) of TCGA 1992 (acquisition costs) are—

(a)if the sum of G and CV exceeds L, increased by the amount of that excess,

(b)if L exceeds the sum of G and CV, reduced by the amount of that excess,

and, in the case of a part disposal of those shares, section 42(2) of that Act (part disposals) has effect accordingly.

(6)If the amount of the excess in subsection (3)(b) or (5)(b) is greater than the amount of expenditure allowable under section 38(1)(a) of TCGA 1992, the amount of the excess which cannot be deducted from the expenditure so allowable is, for the purpose mentioned in subsection (3) or (5) (as the case may be), added to the amount of the consideration for the disposal so mentioned.

(7)Sections 37 and 39 of TCGA 1992 (consideration chargeable to tax on income and exclusion of expenditure by reference to tax on income) do not apply in relation to a disposal mentioned in subsection (2) or (4) above.

(8)For the meaning of G, L and CV, see section 671.