CFM55280 | Holders of convertible or share-linked securities: events treated as disposal of security: examples

Conversion option exercised but cash-settled by issuer

In the example in CFM55260, suppose that on Abacus opting to convert, the terms of the security had allowed the issuer to cash settle for the value of the shares, which was £1.1million, instead of issuing shares. TCGA92/S132 would not then apply, and TCGA92 would treat the transaction as involving a disposal of the security.

CTA09/S670(3) provides for the base cost of the convertible security to be treated as increased (or reduced) by the same aggregate amounts as in the CFM55270 example. So no chargeable gain would arise from the disposal of the security unless the cash settlement amount had exceeded £1.1million.

Exchangeable security

TCGA92/S132 does not apply to a transaction where a security is exchanged for shares in a company other than the issuer (commonly known as ‘exchangeables’ as distinct from ‘convertibles’). For the purposes of TCGA92 the exchange would be treated as involving a disposal of the exchangeable security.

CTA09/S670(3) again provides that for the purposes of TCGA92, the base cost of the security is treated as increased (or reduced) by the same aggregate amounts as in the first case above. The adjusted amount is also treated as the TCGA92 base cost of the exchange shares, for the purposes of a subsequent disposal.

Disposal of the security before maturity

A holder may dispose of a convertible or exchangeable security part way through its life. In those circumstances CTA09/S670(3) makes an appropriate adjustment to its base cost for the purposes of TCGA92.

Securities converted, exchanged or cashed out in periods ended before 30 December 2006

For periods ending before 30 December 2006, the ‘loan relationships’ adjustment required by FA02/SCH26/PARA45H (now CTA09/S670) was the initial carrying value of the embedded option, rather than the ‘CV’ amount. It will be seen from the example that this could potentially lead to double counting where the company disposing of the convertible was not the original subscriber. However, in these circumstances TCGA92/S37 or TCGA92/S39 will apply to exclude from the capital gains computation those amounts that have already been taxed or relieved as income, and have not already been excluded under CTA09/670(3) or S670(5).

For periods ending on or after 30 December 2006, TCGA92/S37 and TCGA92/S39 are disapplied by CTA09/S670(7).