CFM6124a - Taxing loan relationships: convertibles: examples of a share conversion

All debt converted to shares: example

Example

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 issued on a 1.5 for 1 basis, that is, each £1.5 nominal loan stock will be converted into £1 nominal of shares in TG Ltd.

When the debt is exchanged for shares it will be impossible to offer an exact number of shares. KD Ltd will receive 6,666 shares and £1 in cash.

The terms satisfy the conditions of FA96/S92 (1)(ee), so the security will come within S92.