CFM55220 - Holders of convertible or share-linked securities: conditions for CTA09/S645 to apply

CTA09/S645(1)-(6)

This guidance applies where a company bifurcates a loan asset under IAS 39 or FRS 26. Bifurcation is not permitted for financial assets under FRS 102 (unless IAS 39 is applied) or IFRS 9. For further details of the accounting permutations see CFM52215.

Holders of convertibles only: options over shares

Part 7 CTA09 accords a special tax treatment to convertible or exchangeable securities where certain conditions are met. These are in CTA09/S645(1)-(6).

They are:

  • Condition A: There is a derivative contract which is a relevant contract to which a company is treated as a party under CTA09/S585(2) (CFM50420) because of a creditor relationship of the company. In other words, the company must bifurcate the hybrid security in its accounts. or had (Previously this could also be the case where a company elected under CTA09/S416 to be treated as if it did, but any such election only has effect in a period when old UK GAAP is applied, which is not possible for periods of account beginning on or after 1 January 2015, see CFM55210).
  • Condition B: The embedded relevant contract is an option (within S585(3)).
  • Condition C: The underlying subject matter of the contract is 바카라 사이트˜qualifying ordinary shares바카라 사이트™ or 바카라 사이트˜mandatorily convertible preference shares바카라 사이트™ (as defined under S647(4) and (2), respectively - see below).
  • Condition D: The contract must not be held for trading purposes (other than the business of a life insurance company - see CFM54020).
  • Condition E: The company is not an authorised unit trust, an investment trust, an open-ended investment company or a venture capital trust (these are 바카라 사이트˜excluded bodies바카라 사이트™ as defined under CTA09/S706, and are exempt from tax on chargeable gains).

There is now no connected party exclusion under S645. But for accounting periods ending before 16 March 2005, the company must not be 바카라 사이트˜connected바카라 사이트™ with the issuer.

Exclusions

CTA09/S646 states an exclusion from S645 - it does not apply where the conversion shares have a pre-determined cash value. Such a security is redeemed for a fixed amount of 바카라 사이트˜money바카라 사이트™s worth바카라 사이트™: essentially this is no different from a security redeemable for a fixed amount of cash.

Qualifying ordinary shares

These are shares in a company which satisfy conditions A and B:

  • Condition A: any shares, except those carrying a right to a fixed rate dividend but no other rights to share in profits, or shares carrying no right to a dividend of any description, and no other rights.
  • Condition B: the shares are listed on a recognised stock exchange, or are shares in a holding or trading company (as defined under TCGA92/S165A).

Mandatorily convertible preference shares

A company whose shares are publicly traded may not wish to undertake a new issue of shares to satisfy the rights of holders of convertible securities, because of the pre-emption rights of existing shareholders. It is therefore not unusual for the securities to be issued by an offshore subsidiary company, and to convert into 바카라 사이트˜mandatorily convertible바카라 사이트™ (or 바카라 사이트˜mandatorily exchangeable바카라 사이트™) preference shares of this company. These shares must then be exchanged for listed shares in the parent company. Thus the statute defines mandatorily convertible preference shares as shares which

  • represent the creditor loan relationship;
  • are not 바카라 사이트˜qualifying ordinary shares바카라 사이트™ (as defined above); and
  • under the terms of the security, must be converted into, or exchanged for, 바카라 사이트˜qualifying ordinary shares바카라 사이트™ within 24 hours of being acquired by the holder.