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HMRC internal manual

Corporate Finance Manual

Holders of convertible or share-linked securities: pre 1 January 2005 convertibles

Transitional treatment of convertibles held in periods beginning before 1 January 2005

The treatment described at CFM55230 does not apply to convertible securities that were held by the company both before and after the start of its first period of account to begin after 1 January 2005.

Broadly, the previous tax treatment under FA96/S92 is continued. This is achieved by two separate provisions - one relating to the embedded derivative, and one to the host contract.

Where CTA09/S645 applies to a security which was held before the first accounting period beginning on or after 1 January 2005 (‘existing assets’), CTA09/SCH2/PARA82 provides that no amounts are to be brought in under the derivative contracts rules. The security is not treated as a qualifying corporate bond and hence is not treated as exempt from chargeable gains.

As was the case under FA96/S92, adjustments are made to the capital gains disposal consideration to

  • exclude any element of the consideration that, on a just and reasonable apportionment, relates to interest that is accrued but unpaid, and is already taxed under loan relationships; and
  • reduce the consideration by the amount of any exchange gain already taxed under loan relationships, or increase it by the amount of an exchange loss.

The tax treatment of the host contract is given by regulation 11 of the Disregard Regulations (SI 2004/3256), and is described more fully at CFM37690. In brief, only interest (ascertained without reference to an effective interest rate method) and exchange gains or losses are taxed under loan relationships.