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HMRC internal manual

Employment Related Securities Manual

Convertible securities: adjustment of charge to tax on acquisition

When convertible securities are first acquired, liabilities to tax as employment income can arise under

  • Chapter 1 of Part 3 (earnings)
  • Chapter 10 of Part 3 (taxable benefits: residual liability to charge)
  • Chapter 5 of Part 7 (options to acquire securities)

In each case, the market value of the securities acquired is the value of the securities at that time, determined as if they were not convertible. So, in valuing them, the value of the right to convert must be ignored (ITEPA03/S437(1)).


  • Company loan stock of nominal value £100 carrying interest at 4% converts into 10 ordinary shares in three years time.
  • Current share value is £15, so 10 shares are worth £150.
  • Convertible loan stock is valued at £130. Without the conversion right it would only be worth £98.

Charge on acquisition under ITEPA03/S62 (money’s worth) is therefore reduced from £130 to £98. The right to convert worth £32 is ignored.

Modification to acquisition charge where avoidance

From the 2 December 2004 this adjustment to charge is modified by ITEPA437(2) if the main purpose (or one of the main purposes) of the arrangements under which the right or opportunity to acquire the employment-related securities is made available is the avoidance of tax or national insurance contributions.

unless the market value of the employment-related securities determined under subsection (1) would be greater than that determined under subsection (3).

Instead, the market value of the employment-related securities is to be determined:

  • where the employment-related securities fall within ITEPA03/S436(a) and the entitlement to convert is not both immediate and unconditional, as if it were,
  • where they fall within ITEPA03/S436(b) as if the circumstances are such that an entitlement to convert to arises immediately, and
  • where they fall within ITEPA03/S436(c) as if provision were made for their immediate conversion; and in each case is to be determined as if they were immediately and fully convertible.

“Immediately and fully convertible” means convertible immediately after the acquisition of the employment-related securities so as to obtain the maximum gain that would be possible on a conversion at that time (assuming, where the securities into which the securities may be converted were not in existence at that time and it is appropriate to do so, that they were) without giving any consideration for the conversion or incurring any expenses in connection with it.

However, this anti-avoidance modification is not put into effect where to do so would reduce the charge on acquisition - ITEPA03/S437(2).

Where it is intended to argue that this provision applies, advice should be sought from the Technical Adviser, Employee Shares & Securities Unit.