CFM16680 - Taxing loan relationships: convertible and exchangeable securities: taxing the holder: interaction with TCGA 1992

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

Consequent capital gains adjustments for the holder of an embedded option

Where the option element of a convertible or exchangeable security qualifies for chargeable gains treatment, FA02/SCH26/PARA45H prevents double counting of chargeable gains, or allowable losses, under both FA02/SCH26/PARA45A and the mainstream rules of TCGA1992. According to the circumstances it:

• adjusts the base cost of any conversion/exchange shares for the purposes of a subsequent TCGA1992 disposal of those shares, or
• adjusts the base cost of the security itself, in a case where TCGA1992 would treat the holder as making a disposal of the security. This is necessary because where the embedded option qualifies for chargeable gains treatment, the security (considered as an entirety) is provided not to be a qualifying corporate bond for the purposes of TCGA1992, see CFM16665.

The rule makes appropriate adjustments according to whether the security is

• converted
• cash settled
• exchanged for shares in another company
• disposed of before maturity

Conversion is the most common scenario and is explained at CFM16685. The other three cases are explained in CFM16686.