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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Conversion of securities: change in status of debt S88 FA 1997

The types of case most commonly seen have included the following

  • the terms of the debt include a right to convert into a foreign currency. This right lapses after a certain period (which is before any redemption, or other disposal)
  • the debt is denominated in sterling, but with a right for re-denomination into, and repayment in, a foreign currency. This is not a `lapsing right’, as above, but later (before any redemption, or other disposal) the terms of the debt are amended to remove the right
  • the debt is initially denominated in foreign currency. But again, before any redemption or other disposal, the terms of the debt are amended so that the debt is re-denominated into sterling.

All these cases rely on the exclusion of foreign currency debt from the definition of corporate bond in TCGA92/S117 (1)(b), see example CG53745. You may see variants based on other conditions in the QCB tests. While the foreign currency test will no longer be applicable for companies, following the FOREX legislation in FA1993, see CG53776+ and subsequently the loan relationships legislation in FA 1996, see CG54000+, it continues to apply for individuals and other non-corporates.