Income and Corporation Taxes Act 1988

[F1140D Convertible shares.U.K.

(1)This section applies where a person (“the employee") has acquired convertible shares in a company as a director or employee of that or another company.

(2)For the purposes of this section shares are convertible wherever they—

(a)confer on the holder an immediate or conditional entitlement to convert them into shares of a different class; or

(b)are held on terms that authorise or require the grant of such an entitlement to the holder if certain circumstances arise, or do not arise.

(3)The employee shall be chargeable to tax under Schedule E if, at a time when he has a beneficial interest in them, the shares are converted into shares of a different class in pursuance of any entitlement to convert them that has been conferred on the holder.

(4)A charge by virtue of this section shall be a charge for the year of assessment in which the conversion occurs on the amount of the gain from the conversion.

(5)The amount of the gain from the conversion is the amount (if any) by which the market value at the time of the conversion of the shares into which the convertible shares are converted exceeds the sum of the deductible amounts.

(6)The deductible amounts are—

(a)the amount or value of any consideration given for the convertible shares;

(b)the amount or value of any consideration given for the conversion in question;

(c)any amounts on which the employee has become chargeable to tax under Schedule E in respect of his acquisition of those shares;

(d)any amounts on which the employee has, by reference to an event occurring not later than the time of the conversion, become chargeable to tax in respect of the shares under section 78 or 79 of the M1Finance Act 1988 (unapproved employee share schemes);

(e)if the convertible shares were acquired through a series of conversions each of which was a taxable conversion, the amount of the gain from each conversion, so far as not falling within paragraph (c) above.

(7)In subsection (6) above the reference to a taxable conversion is a reference to any conversion which—

(a)gave rise to a gain on which the employee was chargeable to tax by virtue of this section, or

(b)would have given rise to such a gain but for the fact that the market value of the shares at the time of the conversion did not exceed the sum of the deductible amounts.

(8)Tax shall not be chargeable by virtue of this section if—

(a)the conversion is a conversion of shares of one class only (“the original class") into shares of one other class only (“the new class");

(b)all shares of the original class are converted into shares of the new class; and

(c)one of the conditions in subsection (9) below is fulfilled.

(9)The conditions referred to in subsection (8) above are—

(a)that immediately before the conversion the majority of the company’s shares of the original class are held otherwise than by or for the benefit of—

(i)directors or employees of the company;

(ii)an associated company of the company; or

(iii)directors or employees of such an associated company;

and

(b)that immediately before the conversion the company is employee-controlled by virtue of holdings of shares of the original class.

(10)Tax shall not be chargeable by virtue of this section where the interest which the employee acquires in the shares into which the convertible shares are converted is an interest which (within the meaning given for the purposes of section 140A by section 140C) is only conditional.]