CFM16615 - Taxing loan relationships: “hybrid” securities: the layout of the guidance

This guidance applies for periods of account beginning on or after 1 January 2005

The layout of the guidance

CFM16615 to CFM16630 explains the impact of International Accounting Standards on the tax treatment of “hybrid” securities for accounting periods beginning on or after 1 January 2005. These standards radically change the way companies account for “hybrid” loan relationships, such as convertible, exchangeable, and asset-linked (essentially share-linked) securities.

Holders and issuers of “hybrid” securities

The guidance deals firstly with common features of the taxation of convertible/exchangeable securities and share-linked securities ( CFM16635 to CFM16645). Briefly, these are the way in which the taxation of such securities follows the accounting treatment, and the replication of the capital gains treatment for holders. It then explains the detailed tax rules

• for holders of convertible and exchangeable securities – CFM16660 to CFM16686
• for issuers of convertible and asset linked securities – CFM16690 to CFM16730
• for holders of share-linked securities – CFM16750 to CFM16775
• for issuers of share-linked securities – CFM16780 to CFM16810.

Certain hedging derivatives are excluded

Note that certain derivatives are excluded from this tax treatment of “hybrids”, both for holders and for issuers. These are derivatives (mainly futures) used for hedging the convertible or asset-linked security, in order to acquire shares for delivery to satisfy such instruments. These are excluded subject matter in FA02/SCH26/PARA4(2D). As the shares in such cases are taxed as capital gains, so too is the derivative instrument that hedges them. See CFM13104 for more on excluded subject matter.