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HMRC internal manual

Corporate Finance Manual

Old rules: loan relationships: convertibles and asset-linked securities pre 2005: overview

Overview of convertible and asset-linked securities

This guidance applies to periods of account beginning before 1 January 2005 

The current loan relationships rules which apply to the taxation of ‘hybrid’ instruments can be found at CFM37600 onwards. This section sets out the differences which applied for accounting periods starting before 1 January 2005.

The word ‘hybrid’ is used in this section of the Corporate Finance Manual, as it is commonly in commercial parlance, as a shorthand way of describing convertible, exchangeable, asset-linked and similar securities, for which there is a special tax treatment within the loan relationships and derivative contracts rules.

For accounting periods beginning before 1 January 2005 (see CFM82110), FA96/S92 to S93B provided special rules for such ‘hybrid’ types of security. The only credits and debits taxable or relievable as income under the loan relationships rules were those relating to interest, and in some cases exchange gains and losses. Other profits and losses on the security were within the chargeable gains rules, or were ‘tax nothings’, and FA96/S92A restricted relief for the issuer of the security for the costs of issuing or delivering shares.

For periods of account beginning on or after 1 January 2005 the tax rules have been changed to match the prescribed accounting for such ‘hybrid’ instruments, which requires the ‘bifurcation’ of the instrument into the debt component (which is taxed under the loan relationships rules) and the ‘embedded derivative’ (which is taxed under the derivative contracts rules). Full details can be read at CFM37600 onwards (for loan relationships) and at CFM55200 for derivative contracts).

Central to these changes were the repeal of FA96/S92 to S93B and the introduction of new rules at FA96/S94A (now at CTA09/S415 onwards) and at FA02/SCH26/PARA45A to PARA45M (now at CTA09/PT7/CH6).

Guidance on the pre-2005 taxation of convertible securities is at CFM82100.

Guidance on the pre-2005 taxation of asset-linked securities is at CFM82400.