Convertible securities—tax treatment
Convertible securities—tax treatment

The following Tax guidance note provides comprehensive and up to date legal information covering:

  • Convertible securities—tax treatment
  • Main rule on acquisition
  • Anti-avoidance exception on acquisition
  • Tax treatment of convertible securities on disposal, conversion or other chargeable event
  • What is a chargeable event?
  • Calculating the taxable amount on a chargeable event
  • Example
  • Exclusion from convertible securities charge on chargeable event
  • Reporting obligations
  • Associated persons

This note explains the income tax treatment of convertible securities. The definition of convertible securities is set out in Convertible securities—definition.

The basic effect of the rules applying to convertible securities (or an interest therein) contained within Chapter 3, Part 7 of Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) is to treat the securities themselves and the right to convert as two separate assets. Income tax charges can potentially arise:

  1. upon acquisition of the convertible securities, by reference to the value of the underlying securities ignoring the right to convert, and

  2. upon a subsequent chargeable event, namely:

    1. conversion of convertible securities

    2. sale of convertible securities, and / or

    3. change in description (rather than class) of securities

    by reference to the gain on the right to convert (but not any gain on the underlying securities)

Unlike for restricted securities, the legislation does not permit the employer or employee (or director) to elect for an alternative tax treatment. Consequently, it is likely to be beneficial to structure employment-related securities so that they are restricted securities, rather than convertible securities.

Where income tax charges arise in relation to convertible securities for which the employing company is required to account to HMRC via PAYE, note that further income tax and class 1 NICs charges can also arise if the employee or director fails to reimburse the employer