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The purpose of this instruction is to detail a change in policy concerning the assessment of converting preference shares and to clarify the differences between converting preference shares and convertible preference shares.

Distinction Between Converting and Convertible Preference Shares

2.Preference shares differ from ordinary shares in that persons holding such shares have prior claim to distributions of dividends, and to the assets of the company if it were wound up.  In general, preference shares have a fixed dividend payable and the holder may have the right to participate in profits, above the set dividend, once ordinary shareholders have received a payment.

3.Most importantly from an assessment point of view, certain types of preference shares may be able to be converted to ordinary shares.  Where this can be done, the shares are known as "converting preference shares" or "convertible preference shares" depending on whether such conversion is mandatory or optional to the investor.

4.Converting preference shares will convert to ordinary shares at a specified date, at a set ratio.  The investor does not have the option to prevent the conversion taking place at the specified date.  However, in some cases the investor or company can choose to convert the shares to ordinary shares in advance of the date specified.

5.Convertible preference shares differ from converting preference shares in that they give the shareholder the option to convert to ordinary shares, at any time prior to redemption, at a set ratio.  In most cases such shares have a fixed conversion date.

Current DVA Assessment Policy

6.Converting or convertible preference shares purchased before 19 August 1992 are assessed under the saved rules, and only dividends paid in respect of those shares are assessed.  Converting or convertible shares purchased on or after 19 August 1992 are assessed under the current ongoing assessment rules whereby a rate of return is applied to the shares.

7.Where either type of share was purchased before 19 August 1992, and the shares are subsequently converted to ordinary shares on or after 19 August 1992, it is current policy that the ordinary shares are regarded as new shares acquired on the date of conversion and  the ongoing assessment rules apply to the new shares.

8.This policy is based on the premise that new shares are only taken to be acquired where a pensioner exercises a right to acquire those shares.  However, in the case of converting (but not convertible) preference shares the pensioner has no choice but to accept ordinary shares in place of the preference shares on a specified date.

Policy Change to be Implemented

9.Effective immediately, the conversion of converting preference shares to ordinary shares, is to be regarded as a variation in the rights attached to an existing share, rather than an acquisition of new shares.  Thus, after conversion, the ordinary shares will be assessed as having the same acquisition date as the original converting preference shares.  The result of this policy is that where converting preference shares are acquired prior to 19 August 1992, such that they are assessed under the saved rules, they will continue to be assessed under the saved rules if they convert to ordinary shares on or after that date (ie. their saved status is retained).

10.However, the conversion of convertible preference shares to ordinary shares is still to be considered an acquisition of new shares, and where saved shares are converted to ordinary shares on or after 19 August 1992 the ordinary shares will be assessed under the current ongoing assessment rules (ie their saved status is lost).

Review of Assessments Involving Shares Which Have Already Converted

11.Due to the low numbers of pensioners who hold converting or convertible preference shares, and the difficulties associated with trying to identify who may have held such shares in the past (since any such shares would now be listed on the shares database as ordinary shares), it would not be practical to seek out any previous holders of such shares in order to reassess their pension. However, any cases which come to notice as having previously held such shares should be reassessed in accordance with the new policy (ie. the saved status of any ordinary shares that were derived from converting preference shares may need to be re-instated if the converting preference shares were acquired prior to 19 August 1992, and converted to ordinary shares on or after that date).


11.If you have any enquiries in relation to this Instruction, please contact Laurie Howell on telephone 06-289 6440.