BIM44405 | Specific deductions: employee share schemes: providing shares to employees: qualifying shares: convertible shares: examples
From HM Revenue & Customs · Business Income Manual
Example A - convertible securities which convert into qualifying shares
Facts
| Date | - | Amount |
|---|---|---|
| 01/04/2007 | Employee is given £1000 loan stock, with interest at 4%, which can be converted into 1000 £1 ordinary shares after 5 years | - |
| - | Market value of loan stock with conversion rights | £1200 |
| - | Market value of loan stock without conversion rights | £1000 |
| 01/04/2012 | Conversion takes place; market value of shares acquired | £2500 |
| - | Market value of loan stock without conversion rights | £1100 |
| - | No consideration given by employee to convert into shares | - |
Employment Income Tax charges
| Year | - | Amount |
|---|---|---|
| 2006/07 | Income Tax charged on | £1000 |
| 2011/12 | Income Tax charged on £2500 - £1100 = | £1400 |
Deductions for employing company
| Year | - | Amount |
|---|---|---|
| a.p.e 31/12/07 | No deduction (the Income Tax charge relates to acquisitions of loan stock, not qualifying shares) | - |
| a.p.e 31/12/12 | Deduction | £1400 |
Example B - qualifying shares which convert into other qualifying shares
Facts
| Date | - | Amount |
|---|---|---|
| 01/04/2009 | Employee is given 1000 convertible qualifying shares | - |
| - | Market value of shares with conversion rights is | £1100 |
| - | Market value of shares without conversion rights is | £1000 |
| 01/04/2012 | Conversion takes place; market value of new shares is | £2400 |
| - | Market value of old shares without conversion rights is | £2000 |
| - | Consideration given by employee to convert shares | £100 |
Employment Income Tax charges
| Year | - | Amount |
|---|---|---|
| 2008/09 | Income Tax charged on | £1000 |
| 2011/12 | Income Tax charged on £2400 - £2000 - £100 = | £300 |
Deductions for employing company
| Year | - | Amount |
|---|---|---|
| a.p.e 31/12/09 | Deduction | £1000 |
| a.p.e 31/12/12 | Deduction | £300 |
Example C - qualifying shares which convert into non-qualifying shares
If the shares acquired on conversion in Example B were not qualifying shares, the Income Tax position would remain the same, but the deductions given to the employing company would be:
| Year | - | Amount |
|---|---|---|
| a.p.e 31/12/09 | Deduction | £1000 |
| a.p.e 31/12/12 | No deduction (the Income Tax charge relates to the acquisition of non-qualifying shares) | - |