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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Quoted options to subscribe for shares: acquisition cost: detachable warrants

Quoted options often take the form of share warrants attached to a new issue of bonds or debentures. If bonds are bought or subscribed with warrants attached it will be necessary to apportion the acquisition cost between the bonds and the warrants.

Warrants detachable at date of issue

In many cases the warrants can be detached from the bonds as soon as they are issued and the warrants and bonds are traded separately. If the taxpayer has subscribed for such bonds you can accept the apportionment given in the issuing circular or prospectus.

EXAMPLE

In October 2011 a company issues 5,000 £10,000 71/2 per cent bonds maturing in 2016. Each bond has 800 share warrants attached. One share warrant allows the holder to subscribe for one share in the company at a fixed price in a specific period. The prospectus allocates £9,050 to the bonds and £950 to the warrants.

Immediately after the bonds are issued the warrants are detached and traded separately. You can accept that a subscriber for the bonds will acquire the 800 warrants at a total price of £950.

If no allocation is offered you should make the apportionment on a just and reasonable basis, TCGA92/S52(4), see CG14771+. In practice the apportionment should be made by reference to the respective market values of the bonds and warrants on the first day they are traded separately.

Warrants detached later

If the warrant is detached from the bonds some time after the acquisition of the bond you should treat the warrant as derived from the bond. This triggers the operation of TCGA92/S43, see CG15230+. You should apportion the acquisition cost of the bond by reference to the respective market values of the warrant and the bond on the first day they are traded separately.

Warrants never detached

It is possible the warrant may never be detached from the security and the warrant can only ever be exercised by the holder of the security. In this case you should not treat the option as an asset separate from the security. If the option is exercised you should apportion the acquisition cost of the warrant on a just and reasonable basis.