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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Quoted options to subscribe for shares: issue of warrants by person other than co: overseas bank

Large companies may try and avoid the charge under TCGA92/S144 (1) by arranging for overseas companies to issue the warrants. For example, an overseas bank may be responsible for issuing a Eurobond with detachable warrants on behalf of the company. The warrants are exercisable against and a legal obligation of the overseas bank. The company and the bank will have entered into an agreement under which the company agrees to provide the bank with sufficient shares to meets its obligations under the warrants. The terms of the agreement are likely to be such that the bank is contractually required to ask the company to issue the shares. Because there is no element of choice on the part of the bank the agreement between the company and the bank cannot be treated as an option. It is not possible to treat the arrangement as the issue of an option by the company to the warrant holders. Therefore, as far as the company is concerned it has received no consideration for the grant of an option and there is no liability under TCGA92/S144 (1).

The position may be different if the bonds with detachable warrants are issued by an overseas subsidiary of a UK company. The overseas company will have to make suitable arrangements to acquire shares in its parent to fulfil its obligations under the warrants. The UK parent may grant a parallel option to the subsidiary. If the warrants are exercised against the subsidiary, it in turn exercises its options against its parent. Because the agreement between the parent and subsidiary is an option there is a charge under TCGA92/S144 (1) on the parent.

The transaction is between connected persons. Therefore the market value of the option issued by the parent to the subsidiary is substituted for any consideration given. In practice this market value will be the value of the options issued by the subsidiary. If the parent is called upon to issue shares by the subsidiary the TCGA92/S144 (1) liability can be reduced accordingly, see CG12317.

Companies may argue that the agreement between the parent and subsidiary is a single option. Therefore TCGA92/S144 (2) applies to erase the entire liability under Section 144(1) if the parent is called upon to issue a single share. This argument should not be accepted. You should contend that the agreement between the parent and its subsidiary gives the subsidiary a number of options equal to the number of shares in the parent whose liability the subsidiary may be required to procure. There will be a liability under TCGA92/S144 (1) unless the parent is called upon to issue all the shares which it may be required to issue under the agreement.