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HMRC internal manual

Corporate Finance Manual

Derivative contracts: issuers of convertible or share-linked securities: exceptional cash-out - example

Example of an exceptional cash out (CTA09/S666) applying to periods of account beginning on or after 1 January 2005

The facts are the same as above, except that on the holder opting to convert, X Ltd has insufficient headroom to issue the 100,000 shares. It fulfils its obligation by paying the holder their current cash value, £1.2million. Of this, £1m is the amount required to repay the underlying loan; the balance of £200,000 is the amount required to settle its obligation under the equity instrument.

Because X Ltd is not an excluded case (a bank or securities house etc), CTA09/S666(1) allows it to compute an allowable TCGA1992 loss. The loss is the excess of ‘A’ - the amount paid to redeem entire security (£1.2m) less the fair value of the underlying host contract at that time (£1m), so £200,000 - over ‘B’, its initial fair value, here £49,000. X Ltd’s allowable loss is therefore £151,000.

For periods ending before 30 December 2006, ‘A’ is simply the amount paid to settle the equity instrument (here £200,000).

The capital loss is a ‘free-standing’ loss arising in the accounting period in which the cash settlement occurs. It does not arise from any natural or deemed disposal. So the loss cannot be treated as if it arose in another group company by virtue of an election under TCGA92/S171A (see CG45355).