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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Old rules: convertibles pre 2005: nature of the security: security wholly replaced by shares

All debt converted to shares

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

FA96/S92(1)(ee) stated that the terms for conversion must have ensured that the security was wholly replaced by shares. However, where this was not possible - because a whole number of shares could not be transferred - the issuer could make a cash adjustment for that fraction of a share.

This provision ensured that the return came in the form of shares and not cash.

Any cash adjustment could not exceed 5% of the value of the shares on exercise (S92(1D)).


LB Ltd issued a security for £10,000 with a face value of £10,000 to KD Ltd. The terms showed that

  • at the end of one year, the holder could choose to exchange the security for shares in TG Ltd
  • the shares would be issued on a 1.5 for 1 basis, that is, each £1.5 nominal loan stock would be converted into £1 nominal of shares in TG Ltd.

When the debt was exchanged for shares it would have been impossible to offer an exact number of shares. KD Ltd would receive 6,666 shares and £1 in cash.

The terms satisfied the conditions of FA96/S92(1)(ee), so the security would have been within S92.