»Ê¹ÚÌåÓýapp

Right to sell the security

This guidance applies to periods of account beginning before 1 January 2005

FA96/S92(1)(dd) ensured that there were no ‘premium put� arrangements. A ‘premium put� gives the holder of the security the right to require any person (except the issuer of the security) to purchase the security at a premium if the holder does not exercise its right to convert.�

Because this was not an amount payable on redemption, the security was not an RDS, but instead it was caught by S92(1)(dd). »Ê¹ÚÌåÓýapp ultimate reward could still be the equivalent of a deep gain, which should be taxed as income.

Right to sell the security: example

LB Ltd issued a security for £10,000 with a face value of £10,000 to KD Ltd, an unconnected company. »Ê¹ÚÌåÓýapp terms showed that

• at the end of Year 1, the holder could choose to exchange the security for shares in TG Ltd, a trading subsidiary of LB Ltd.
• the shares would be exchanged on a 1 for 1 basis, that is, £1 nominal loan stock would be exchanged for £1 nominal of shares in TG Ltd
• alternatively, the holder could require TT Ltd (a third company, subsidiary of LB Ltd) to buy the security for £15,000 before redemption or conversion.

»Ê¹ÚÌåÓýapp security was a convertible, but the terms put KD Ltd in the same position as if it had an RDS (see the example at CFM82270). KD Ltd could obtain £15,000 for the security, which was the equivalent of a deep gain on redemption.

»Ê¹ÚÌåÓýapp reward came in the form of an increased amount payable on redemption. This was an income reward, which was taxed under loan relationships.