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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Loan relationships: shares acting like debt: equity-linked note

Debt linked to shares: example

AX Ltd issues loan notes for £100,000 to BS Ltd. The terms are such that if the value of the shares of AX Ltd increases then the percentage increase will determine the amount to be repaid on the loan notes. Thus if AX Ltd shares are valued at £1.50 on day 1 and £3.00 on the redemption date then BS Ltd will receive £200,000.

BS Ltd’s position in terms of the cash it receives is exactly the same as if it had

  • bought the shares instead of lending the money, and
  • sold the shares instead of redeeming the note.

The tax treatment will reflect this. Special rules apply to the treatment of such ‘hybrid’ securities in periods beginning on or after 1 January 2005 - see CFM37600.

For periods of account beginning before 1 January 2005, such asset-linked securities may be taxed under the CG rules, see CFM80000.