CFM6121a - Taxing loan relationships: convertibles: examples of an option to acquire shares

Entitlement to acquire shares: examples

Example 1

LB Ltd issues a security for £10,000 with a face value of £10,000, to KD Ltd. The terms show that

• at the end of 1 year, the holder can choose to convert the security into LB Ltd shares
• the shares will be issued on a 1 for 1 basis, that is, £1 nominal loan stock will be converted into £1 nominal of shares issued by LB Ltd.

This security will satisfy the conditions in S92(1)(b).

If KD Ltd decides not to opt to convert, and continues to hold the security, it will cease to satisfy the conditions of FA96/S92 (1)(b) and will then be dealt with as a normal loan relationship.

Example 2

LB Ltd issues a security for £10,000 with a face value of £10,000, to KD Ltd. The terms show that

• at the end of 1 year, the holder can choose to exchange the security for shares in TG Ltd
• the shares will be exchanged on a 1 for 1 basis, that is, £1 nominal loan stock will be exchanged for £1 nominal of shares in TG Ltd.

LB Ltd may already own TG Ltd shares, or may have to buy them in order to fulfil the terms of the security.

This security will satisfy the conditions in S92(1)(b).

If KD Ltd decides not to opt to convert, and continues to hold the security, it will cease to satisfy the conditions of S92(1)(b) and will then be dealt with as a normal loan relationship.