Convertible securities

Shares or securities may have certain rights to convert into other types of shares or securities on specific events, or may be subject to certain conditions. For example, in one company, A ordinary shares with limited rights might automatically convert into ordinary shares with full rights if there is an admission of the shares in the company to the AIM. In another company, a person might acquire loan stock that converts into ordinary shares after a fixed period if the loan is not repaid.

On conversion, the value of the shares or securities may increase so that the holder makes a notional gain or can sell for a real gain.

The rules on convertible securities apply where tax and National Insurance is charged in a gain where:

• •a person has a right or opportunity through his employer to acquire shares
• •those shares are convertible
• •there is a gain on conversion

This liability can arise in respect of:

• •any interests in securities, whether the opportunity is given by the employer, a former or prospective employer, or any other person connected with that employer
• •interests acquired by the employee, a relative or any other person

It is important to note that convertible securities might also be restricted securities (see the Restricted securities guidance note). If the securities fall within the scope of the rules applying to restricted securities, treating the securities as restricted using a section 431 election may minimise the overall liability.

The convertible securities legislation is found in ITEPA 2003, ss 435–444 (Ch 3, Pt 7).

Convertible securities