Draft regulations: derivatives used to hedge foreign exchange risks in share transactions

We welcome views on this draft statutory instrument, which will extend the scope of existing regulations designed to align the tax treatment of hedging instruments and hedged items, ahead of its proposed introduction in 2022.

Under current rules such derivatives are taken into account as income items during the lifetime of the contract. This gives rise to a mismatch with the tax treatment of the shares, which will not be taxed or relieved until the shares are ultimately disposed of or may alternatively be covered by the substantial shareholding exemption.

As part of the work on asset holding companies, the government announced that it was examining the possibility of legislating to address this issue and continued to take account of stakeholders’ views on this matter.

This instrument seeks to remove the current tax mismatch on such derivatives, covering different commercial hedging and share transaction structures. This will create a fairer and more complete tax regime for hedging, which will also support the new asset holding company regime.

This technical consultation seeks feedback from stakeholders on the draft regulations to make sure they deliver the policy correctly and effectively.