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HMRC internal manual

Lloyd's Manual

Conversion: collective conversion schemes: shares and loan stock

No two collective conversion schemes are identical. The tax treatment relating to the capital losses of participators depends on the facts of each case. In some cases, ordinary and conversion shares were subscribed for at the outset. In others, convertible loan stock rather than conversion shares were issued.

Shares in CCVs

In most cases shares in collective conversion vehicles (CCVs) were issued in consideration of cash and/or the transfer of syndicate capacity to the company. The initial subscription shares in such schemes where the participator has to subscribe are likely to have value when acquired and a capital gains tax loss might arise on their disposal, including a disposal where there is a claim that shares have become of negligible value.

The value of such shares will not necessarily equate with the consideration given for them. Subject to the facts of each case, and subject to the conditions of each section being satisfied, claims may be made or notices given under one or more of TCGA92/S16 (2A), TCGA92/S24 (2) and ICTA88/S574 or ITA07/S131. For claims under that provision no relief is available for shares issued after 5 April 1998 in a company carrying on an insurance business.

A claim under TCGA92/S24 (2) requires the shares to have become of negligible value. Shares that were already of negligible value at the time of acquisition (for example, where the conversion vehicle was loss making) are unlikely to qualify. The validity of such claims will depend on the facts of each case.

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Loan stock in CCVs

The treatment of what in some schemes is referred to as ‘nil paid convertible unsecured loan stock’, is less clear. In many cases, no debt was actually incurred when the document was issued, no interest was payable, and immediately it was paid up conversion into shares took place.

In some cases, this may not be a type of debt instrument at all. It may, for example, be an option granted to the holder of the document that allows the holder to require the company to issue shares, coupled with an obligation on the holder to subscribe for any remaining balance of the shares not previously issued when required to do so by the company.

Subject to this, in cases where company document really is exchanged for shares, the position will depend on whether the conversion of securities provisions of TCGA92/S132 apply when the conversion into shares takes place.

If TCGA92/S132 does apply the shares will be treated as having been acquired when the debt was acquired, so the cost of the shares will be the same as the cost of the debt. A negligible value claim under TCGA92/S24 (2) will be possible provided the debt was valuable when it was incurred.

However, no claim can be made under ICTA88/S574 or ITA07/S131, which requires, among other conditions, disposal by an individual of shares. The definition of ‘shares’ in this section does not include loan stock, and no claim would have been possible in respect of the original asset, that is, the loan stock.

If TCGA92/S132 does not apply then the cost of the shares for capital gains purposes will be the market value of the asset given in exchange for the shares. That asset would be the debt due to the holder of the loan stock. The market value of a debt will not, of course, necessarily be the same as the nominal value of the debt.