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HMRC internal manual

Corporate Finance Manual

Old rules: convertibles pre 2005: return on the security: premium put arrangements

Right to sell the security

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

FA96/S92(1)(dd) ensured that there were no ‘premium put’ arrangements. A ‘premium put’ gives the holder of the security the right to require any person (except the issuer of the security) to purchase the security at a premium if the holder does not exercise its right to convert.’

Because this was not an amount payable on redemption, the security was not an RDS, but instead it was caught by S92(1)(dd). The ultimate reward could still be the equivalent of a deep gain, which should be taxed as income.

Right to sell the security: example

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

  • at the end of Year 1, the holder could choose to exchange the security for shares in TG Ltd, a trading subsidiary of LB Ltd.
  • the shares would be exchanged on a 1 for 1 basis, that is, £1 nominal loan stock would be exchanged for £1 nominal of shares in TG Ltd
  • alternatively, the holder could require TT Ltd (a third company, subsidiary of LB Ltd) to buy the security for £15,000 before redemption or conversion.

The security was a convertible, but the terms put KD Ltd in the same position as if it had an RDS (see the example at CFM82270). KD Ltd could obtain £15,000 for the security, which was the equivalent of a deep gain on redemption.

The reward came in the form of an increased amount payable on redemption. This was an income reward, which was taxed under loan relationships.