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HMRC internal manual

Capital Gains Manual

Qualifying corporate bonds: loan relationships: convertible securities

FA96/S92, FA96/S92 (4)

This guidance describes the capital gains aspects of the regime for Loan Relationships for companies from 1 April 1996 until the first accounting period to start on or after 1 October 2002. For periods beginning on or after 1 October 2002 see CG54100+

FA96/S92 excludes from the new regime the profit or loss on redemption or other disposal of an asset representing a creditor debt relationship, where

  • the rights attaching to the debt include provision whereby the creditor is, or may become, entitled to acquire shares in (any) company, whether by conversion or exchange of the debt or otherwise, and
  • at the time the debt was created there was a more than negligible likelihood that the right to acquire the shares would in due course be exercised to a significant extent.

The exclusion does not however apply if

  • the extent to which shares may be acquired is determined using a cash value specified in, or ascertainable by reference to, the terms of the provision; or
  • the asset is a relevant discounted security; or
  • a disposal of the asset would fall to be treated as a disposal in the course of activities forming an integral part of a trade carried on by the company.

There is advice on the meaning of relevant discounted security at CG54210+. For the interpretation of these conditions generally, see the detailed advice on loan relationships in the CT manual. FA2002 amended section 92 FA1996 for accounting periods ended on or after 26 July 2001. For detailed guidance on section 92 as amended see CFM6100+.

Because their value will reflect the value of the underlying shares, only amounts relating to interest on these debts are brought into the income regime. Any profits or losses on disposal remain to be dealt with under capital gains rules. These rules are, however, modified to ensure that gains on debts within FA96/S92 are always chargeable.

TCGA92/S251 (7) and TCGA92/S251 (8) ensure that where the disposal of a debt within FA96/S92 gives rise to a gain, the debt is treated as a security. So the exemption for simple debts in TCGA92/S251 (1) does not apply in these cases. See CG53444+.

Any charge, or allowance, on disposal would also be lost if the debt was a QCB. This is prevented by FA96/S92 (4) and TCGA92/S117 (A1). The combined effect of these Sections is that the debt is not treated as a QCB.

When computing any chargeable gain or allowable loss you should adjust the consideration for the acquisition or disposal of the debt to exclude any amounts which relate to interest. This applies also to events which would have been an acquisition or disposal but for TCGA92/S127 or TCGA92/S116 (10).