What are mandatorily convertible preference shares under section 647 of the Corporation Tax Act 2009?

Under section 647, mandatorily convertible preference shares are non-ordinary shares that represent a creditor relationship referred to in section 645 and whose terms of issue require them to be converted into or exchanged for qualifying ordinary shares within no more than 24 hours after the shares are acquired by the person who previously held the creditor relationship.

What conditions must qualifying ordinary shares satisfy under section 647 CTA 2009?

Qualifying ordinary shares must satisfy two conditions. Condition A requires them to form part of the company's issued share capital carrying variable profit-sharing rights beyond a fixed-rate dividend. Condition B requires them to be listed on a recognised stock exchange or to be shares in a trading company or holding company as defined by section 165A TCGA 1992.

How does section 647 relate to section 645 of the Corporation Tax Act 2009?

Section 647 provides the precise definitions of 'mandatorily convertible preference shares' and 'qualifying ordinary shares' that are used in section 645. Section 645 deals with chargeable gains arising from embedded derivatives in creditor relationships that are options, and relies on these defined terms to determine the applicable tax treatment.

Where do the definitions of trading company and holding company in section 647 come from?

The definitions of 'trading company' and 'holding company' used in section 647 are taken from section 165A of the Taxation of Chargeable Gains Act 1992. That section defines these terms in the context of gift relief for business assets. These definitions determine whether shares satisfy Condition B of the qualifying ordinary shares test.

Corporation Tax Act 2009 section 647

Meaning of certain expressions in section 645

Section 647 defines the key terms used in section 645, specifically "mandatorily convertible preference shares" and "qualifying ordinary shares", which are relevant to the treatment of embedded derivatives in creditor relationships that are options.

Mandatorily convertible preference shares are non-ordinary shares representing a creditor relationship that must be converted into or exchanged for qualifying ordinary shares within 24 hours of acquisition
Qualifying ordinary shares must form part of a company's issued share capital and carry rights to share in profits beyond a fixed-rate dividend
Qualifying ordinary shares must either be listed on a recognised stock exchange or be shares in a trading company or holding company
The definitions of "holding company" and "trading company" follow those used for gift relief on business assets under section 165 of the Taxation of Chargeable Gains Act 1992

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