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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Old rules: convertibles pre 2005: conditions for lender

Conditions for S92 to apply

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

In order for a holder of a security to benefit from the chargeable gains treatment, a number of conditions had to be fulfilled.


Firstly, there had to be no connection between the parties when the security was issued. If there was a connection, the security could never get CG treatment. There are details of this at CFM82150. (See also the transitional rules set out at CFM82160.)


Secondly, the security could not be trading stock in its wider sense i.e. circulating capital - for further information see CFM82140.

The convertible

Where the security was issued to an unconnected party, and was not held as trading stock, it then had to satisfy every oneof a number of conditions. The legislation concerning the issue terms that a security must satisfy were in FA96/S92(1), with further definitions in S92(1A)-(1D)

These conditions dealt with

  • the nature of the security - see CFM82170
  • the nature of the shares to be offered in exchange or for conversion - see CFM82220
  • the monetary return on the security - see CFM82240

The aim was to ensure that the security genuinely provided the investor with an equity-type return. If the security failed any of these conditions, all profits or losses came within the loan relationship rules.