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Taxing the separate loan element

Where in accordance with generally accepted accounting practice a company accounts separately for the loan and the embedded derivative or equity instrument, CTA09/S415 mirrors that treatment for tax. The loan element is treated as a loan relationship in its own right, and taxed fully under the loan relationships rules.

In the example at CFM37650, the holder of a convertible security divided the £1m purchase price as between:

£947,513 paid to acquire the ‘host’ loan, and

£52,487 paid for the embedded derivative.

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