CFM16700 - Taxing loan relationships: convertible and exchangeable securities: taxing the issuer: standard convertible: exceptional cash out
This guidance applies to periods of account beginning on or after 1 January 2005
Tax treatment of the issuer of a standard convertible security with an exceptional cash out
Exceptionally, on the holder exercising the conversion option
the issuer may have insufficient “headroom” to issue
the requisite shares, if doing so would breach the maximum issued
share capital permitted by its Memorandum and Articles. It may
therefore have to cash settle its obligation by paying the holder
the equivalent of the share value. If this happens, and provided
none of the exclusions below applies, FA02/SCH26/PARA45JA allows
the issuer to compute an allowable capital loss. The loss is equal
to the excess, if any, of the amount paid to settle the option over
its initial fair value. See the example at
CFM16700a.
This should not be confused with a case where the terms of
the security permit cash settlement instead of physical delivery of
shares, and as a result the issuer accounts for the security as a
financial liability plus an embedded option. Such a security would
not be a “standard” (“plain vanilla”)
convertible in the first place, see
CFM16690, but non- standard. For the tax
treatment of the issuer of a “non-standard” convertible
under FA02/SCH26/PARA45J see
CFM16705.
Excluded categories
This special FA02/SCH26/PARA45JA loss is not available:
- to a borrower which became a party to the security in the ordinary course of a trade as a bank or securities house; or
- to an Authorised Unit Trust, Investment Trust, Open Ended Investment Company or Venture Capital Trust; or
- where the “original relationship” (that is, the contract falling within the loan relationships rules) is one to which the issuer was a party before its first accounting period to begin on or after 1 January 2005 ( CFM16720).
