Employment Tax

Convertible securities

Produced by Tolley in association with Ken Moody
  • 25 Oct 2021 14:11

The following Employment Tax guidance note Produced by Tolley in association with Ken Moody provides comprehensive and up to date tax information covering:

  • Convertible securities
  • Overview
  • What are convertible securities?
  • Comparison with restricted shares
  • Tax liability on acquisition of convertible securities
  • Other events creating a charge in connection with convertible securities
  • Calculating the gain
  • Interaction with Part 7A ― disguised remuneration
  • Employer’s secondary NIC
  • Exceptions

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 the shares in the company are admitted 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.

Where the rules on convertible securities apply, tax and NIC are charged on a gain where:

  1. a person has a right or opportunity through his employer to acquire shares

  2. those shares are convertible

  3. there is a gain on conversion

This liability can arise in respect of:

  1. 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

  2. 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).

What are convertible securities?

Convertible securities do not have the same meaning as readily convertible assets. This term is relevant for determining whether PAYE must be applied and whether there is a liability to pay NIC.

Convertible securities, in the context of ITEPA 2003, ss 435–444 (Ch 3, Pt 7), are shares, securities or similar rights including debentures, bonds or loan notes, where:

  1. the holder can convert the securities into other securities (it does not matter when or if

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