Where rights on shares ‘flower’ or
‘blossom’ on the happening of an event or after a
certain period of time, they are likely to fall within the
definition of ‘convertible securities’ (see
ERSM40020) and be taxed under Chapter
3. However, they may equally fall within the definition of
‘restricted securities’ (ITEPA03/S423) in Chapter 2.
Where either Chapter 2 or 3 could apply, we would normally expect
the Chapter 2 scheme of taxation on restricted securities to be
preferred by the employee, because of the greater flexibility
provided by elections and a more ‘front-loaded’ charge.
Where a forfeiture provision is contained within the articles
of association and the forfeiture provision lapses (e.g. through
the effluxion of time) the vesting of the shares does not
constitute a conversion of a security into a security of a
different description and trigger an income tax charge on the
market value of the fully vested share less the market value of the
forfeitable share.
HM Revenue & Customs will not seek to impose an
alternative charge, provided there is a consistent approach adopted
and there is no avoidance of tax or NIC by manipulation of
arrangements or values.
However, there could be restricted securities which convert
into a different type of security and both Chapters may then come
into play but, in any event, the same gain will not be taxed twice.
If inherent rights do not create a convertible security there
may still be a charge under Chapter 4 on any benefit received by
the employee in connection with the fulfilment of those rights.
See ERSM40040
Say, for example, an employee has acquired convertible bonds in
his company and one third of them convert each year into shares.
Will the restriction inherent in the time limits for conversion
bring the bonds into Chapter 2 on restricted securities, so that
there would be a chargeable event on each of the 2nd, 3rd, and 4th
anniversaries of acquisition, as well as under Chapter 3?
We view the conversion right as an additional right attaching
to the underlying security, which enhances rather than reduces its
value. This will remove any charge under Chapter 2 and will leave
the charge under Chapter 3 until an actual conversion takes
place.
