CFM6142a - Taxing loan relationships: convertibles: example of a relevant discounted security

Type of security: example

LB Ltd issues a security for £10,000 with a face value of £15,000 to KD Ltd. The terms show that

• at the end of Year 1, 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
• alternatively, the holder can choose to redeem the security for £15,000 at the end of Year 1.

The security is a relevant discounted security as the amount payable on redemption, £15,000, when compared with the issue price, £10,000, constitutes a deep gain.

Even though the security is a convertible security, it is prevented from getting chargeable gains treatment because it is also an RDS. The reward for lending money is the increased amount payable on redemption. This is an income reward and is taxed accordingly.