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HMRC internal manual

Employment Related Securities Manual

University Spin-outs

Spin-outs created before 2 December 2004: convertible shares

If a convertible share structure has been used, for what ever reason, Chapter 4A does not contain any provisions to disregard the value of intellectual property on the conversion of these to other securities.

Example 12 - convertible preference share structure

In August 2004 a spin-out is set up between University of Atlantis and one of its researchers, Diana. They are aware of the changes to taxation of employment-related securities from 2003 and decide to use a convertible preference share structure as set out in the Memorandum of Understanding – see ERSM100340.


This structure ensured that no Income Tax or NICs charge arose when the shares are acquired. If the spin-out is not a success the IP transfers back to the University, any funding left is likely to revert to the lender under the terms on which investment was made, and Diana’s convertible shares are worth no more than she paid for them. There will be no liability to IT or CGT. If the spin-out is a success, Diana can sell her shares without converting them or after conversion. In either case there will be an Income Tax and NICs liability. The Memorandum contains fully worked examples.