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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Employment-related securities: employee: employment income: convertible securities

TCGA92/S149AA

TCGA92/S149AA prevents the market value rule applying to the acquisition of convertible employment-related securities. See CG56321. The acquisition cost for capital gains purposes is instead built up from the actual cost and amounts chargeable to Income Tax.

Section 437 ITEPA03 provides that for the purposes of any liability to Income Tax in respect of earnings under Section 62 ITEPA03 the market value of convertible employment-related securities is normally to be determined as if they were not convertible. Thus, if the employee’s acquisition cost for capital gains purposes were to be market value, there could be a mismatch. (See CG56337.)

The capital gains acquisition cost of convertible employment-related securities acquired on or after 1 September 2003 is, by TCGA92/S149AA

  • their actual cost at the date of acquisition together with
  • any amount which constituted earnings in respect of their acquisition under s62 ITEPA03 (for disposals after 11 March 2008 exempt income is ignored. For disposals after 5 April 2015 earnings which were not charged to UK tax, but which would have been exempt if they had been, are also ignored) and
  • amounts counting as income under S438 on a conversion under S439(3)(a) Chapter 3 Part 7 ITEPA03. See TCGA92/S119A and CG56328-9.

In the case of shares which on acquisition became employee shareholder shares (see CG56700+) the consideration for the acquisition is (subject to the operation of s119A) equal to the amount that constituted earnings under s62 or s226A ITEP03 and no other consideration is treated as having been given for the acquisition of the shares.

For acquisitions before 1 September 2003 the starting point for the acquisition cost is simply the market value and there is no addition for an amount constituting employment income under S62 ITEPA or S19 ICTA88. FA03 transitional provisions may apply in relation to acquisitions in 2003.

The capital gains acquisition cost of convertible shares acquired before 16 April 2003 is

  • their market value at the date of acquisition together with
  • any amount chargeable to Income Tax under ICTA88/S140D (from 6 April 2003 Chapter 3 Part7 ITEPA03) before 1 September 2003, allowable under TCGA92/120, see CG56329 and
  • any amount chargeable to Income Tax on conversion under S438 on a conversion under S439(3)(a) Chapter 3 Part 7 ITEPA03 on or after 1 September 2003, allowable under TCGA92/119A, see CG56328.

The capital gains acquisition cost of convertible securities acquired after 15 April 2003 but before the 1 September 2003 is

  • their market value at the date of acquisition together with
  • any amount chargeable to Income Tax under S438 Chapter3 Part7 ITEPA03 before 1 September 2003, allowable under TCGA92/120, see CG56329 and
  • any amount chargeable to Income Tax on conversion under S438 and S439(3)(a) Chapter 3 Part 7 ITEPA03 on or after 1 September 2003, allowable under TCGA92/119A, see CG56328.