CFM6131b - Taxing loan relationships: convertibles: example of controlling share value

Qualifying ordinary shares: trading company 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 convert the security into 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.

TG Ltd is a subsidiary of LB Ltd. It is not a trading company, and holds only one asset, a security issued by TT Ltd, another subsidiary of TG Ltd. This security will redeem for £15,000.

This arrangement ensures that TG Ltd's shares are worth £15,000. The value of the shares offered in exchange are controlled, and KD Ltd is not exposed to the fluctuations in value that would happen if TG Ltd was a trading company open to market influences.