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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Specific deductions: employee share schemes: providing shares to employees: qualifying shares: convertible shares

S1011, S1019, S1030-S1036 Corporation Tax Act 2009

Special rules apply if employees acquire qualifying shares which are:

  • convertible into other shares or securities, or
  • acquired on conversion from other shares or securities.

Deductions for the provision of qualifying shares under the special rules are given:

  • when employees acquire qualifying shares which are convertible (into other qualifying shares or into other shares or securities);
  • when employees acquire qualifying shares under existing conversion rights (on conversion from other qualifying shares or from other shares or securities).

The amount allowed as a deduction in each of these relief-triggering events is the amount taxable as employment income as a result of the event (or, for shares acquired through a tax-advantaged EMI option, would be chargeable but for an exemption from tax).

The most common situation covered by the new rules is likely to be employees’ acquisitions of convertible loan stock that has a right to convert into qualifying shares. No deduction is given under the qualifying shares rules when the employees acquire the loan stock. When the loan stock is converted into qualifying shares a deduction is given for the amount treated as employment income as a result of the conversion.

Income Tax charges

The Income Tax treatment reflects the reality that the employee is acquiring two assets - a share or security plus a right to convert it into another share or security. Income Tax charges arise when the employee:

  • acquires the share or security, ignoring the right to convert;
  • converts the share or security into other shares or securities in accordance with the existing conversion rights.

On the acquisition of convertible shares or securities Income Tax is charged on what would be their market value at that time if they were not convertible.

Later, on conversion, the employee is taxed as if an option had been exercised, with the market value of the convertible shares or securities given up being treated as consideration for the new shares or securities acquired.


Examples of how to compute Income Tax charges in respect of convertible shares or securities and therefore the amount of the deduction given to the employing are at BIM44405.