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HMRC internal manual

Employment Related Securities Manual

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HM Revenue & Customs
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Convertible Securities

Interaction with restricted securities

Flowering or blossoming shares or other securities

Where rights on shares ‘flower’ or ‘blossom’ on the happening of an event or after a certain period of time, they are likely to fall within the definition of ‘convertible securities’ (see ERSM40020) and be taxed under Chapter 3. However, they may equally fall within the definition of ‘restricted securities’ (ITEPA03/S423) in Chapter 2. Where either Chapter 2 or 3 could apply, we would normally expect the Chapter 2 scheme of taxation on restricted securities to be preferred by the employee, because of the greater flexibility provided by elections and a more ‘front-loaded’ charge.

Where a forfeiture provision is contained within the articles of association and the forfeiture provision lapses (e.g. through the effluxion of time) the vesting of the shares does not constitute a conversion of a security into a security of a different description and trigger an income tax charge on the market value of the fully vested share less the market value of the forfeitable share.

HM Revenue & Customs will not seek to impose an alternative charge, provided there is a consistent approach adopted and there is no avoidance of tax or NIC by manipulation of arrangements or values.

However, there could be restricted securities which convert into a different type of security and both Chapters may then come into play but, in any event, the same gain will not be taxed twice.

If inherent rights do not create a convertible security there may still be a charge under Chapter 4 on any benefit received by the employee in connection with the fulfilment of those rights.

Flowering shares acquired pre-16 April 2003

See ERSM40040

Are time limits for conversion a restriction?

Say, for example, an employee has acquired convertible bonds in his company and one third of them convert each year into shares. Will the restriction inherent in the time limits for conversion bring the bonds into Chapter 2 on restricted securities, so that there would be a chargeable event on each of the 2nd, 3rd, and 4th anniversaries of acquisition, as well as under Chapter 3?

We view the conversion right as an additional right attaching to the underlying security,which enhances rather than reduces its value. This will remove any charge under Chapter 2 and will leave the charge under Chapter 3 until an actual conversion takes place.