CFM6131a - Taxing loan relationships: convertibles: dividend rights example

Qualifying ordinary shares: right to a dividend 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 for 1 basis, that is, £1 nominal loan stock will be converted into £1 nominal of shares in TG Ltd
• the shares in TG Ltd to be offered in exchange carry the right to a fixed dividend payment each year. Any dividend payments not paid will be rolled up and paid when there are funds available.

As the shares are guaranteed to generate a set amount of income, their value has, to some extent, been predetermined and controlled. The return on the loan has likewise been predetermined. The security will not fall within FA96/S92.