ERSM40310 - Convertible Securities

Old regime: exception to charge on conversion

Where shares acquired on or after 17 March 1998 can be converted to another class of shares, there is an income tax charge on the gain on conversion under ITEPA03/S438 where conversion takes place before 1 September 2003 – see ERSM40300.

There is an important exception to this charge, under ITEPA03/S440, which will leave many share conversions outside the scope of income tax. This applies only where

• the conversion of shares is a conversion of shares of one class only into one other class only,
• all the shares of the original class are converted into shares of the new class, and
• either the majority test or the employee control test is satisfied (see below).

In these circumstances the conversion is outside the scope of the income tax charge.

Majority test

The majority test is satisfied if the majority of the original class of shares which the employee has acquired are not held by

• directors or employees of the company,
• an associated company, or
• directors or employees of an associated company.

Employee control test

The employee control test is satisfied if the majority of the company's shares of the same class as the convertible shares are held by employees or directors of the company and those directors and employees are (as the holders of those shares) able to control the company.