HMRC internal manual

Corporate Finance Manual

Old rules: convertibles pre 2005: tax treatment for lender

Amounts to be brought in

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

Where a security satisfied all the conditions of FA96/S92 (1) and S92(1A) to (1G), then S92(2) provided that the only amounts to be brought into account under the loan relationships legislation were

  • interest, and
  • any exchange gains and losses.

These amounts were to be brought in using an authorised accruals basis of accounting (for accounting periods starting on or after 1 January 2005, amortised cost basis is used).

Any other amounts were dealt with under the chargeable gains rules - including any discount. See CG54025.


AX Ltd held securities with a face value of £100,000 issued by BH Ltd on 1 July 2002, redeemable or exchangeable on 30 June 2004. AX Ltd and BH Ltd were not connected. The securities carried the right to be exchanged for shares in CV Ltd at the rate of £1 of shares for every £2 of debt. The securities carried interest at 2% per annum, payable annually on 30 June.

On 30 June 2004 AX Ltd exchanged the securities for 50,000 shares in CV Ltd, which had a market value of £3 per share.

Loan relationships

The interest accruing, of £2,000 each year, would be brought into AX Ltd’s accounts as a credit each year. No other amounts were brought in.

Comparison with accounting treatment in the accounts of the holder

The accounts would show interest brought in on an accruals basis. The accounts may not have shown any change in value of the underlying shares over the period to conversion. On conversion, the security would be rebadged as an investment. The shares acquired as a consequence of the conversion or exchange may have been carried at their historic cost, which was the amount subscribed for the debt, or alternatively might have been revalued to reflect the market value. If the shares were revalued, the corresponding entry would have been taken to the revaluation reserve.

In many cases the tax treatment would therefore have followed the accounting treatment and no adjustments would have been needed.