Securities

30 Seconds Definition

A security is a financial instrument that represents an ownership interest, a creditor relationship, or the right to acquire one. In a business context, securities include ordinary shares, preference shares, loan notes, debentures, and options over shares. When HMRC refers to transactions in securities, the term covers all of these instruments — not just shares. Understanding what type of security is involved in a transaction is a prerequisite to understanding how the proceeds will be taxed.

What Counts as a Security

In everyday language, people tend to use share and security interchangeably. They are not the same thing. A share is one type of security — the most common type in a private company context — but the category is considerably wider.

Shares and stock. Ordinary shares, preference shares, alphabet shares, and any other class of share capital issued by a company all qualify as securities. In most founder-owned businesses, ordinary shares will be the only class in issue.

Loan notes and debentures. A loan note is a debt instrument issued by a company to a lender in exchange for capital. Unlike a bank loan, a loan note is transferable and can be structured to carry interest, defer the tax point on exit proceeds, or convert into equity. A debenture is a broader term for any secured or unsecured debt security issued by a company. Both are securities.

Options and warrants. A right to acquire shares in the future at a fixed or formula price is also a security. Options are common in management incentive schemes — for example, EMI share options — and in investor deal structures. A warrant is similar in effect but typically issued as a separate instrument rather than under a formal scheme.

Why the Distinction Matters in a Deal

The type of security a seller disposes of, or receives as consideration, determines how the proceeds are taxed. A straightforward cash sale of ordinary shares is a capital disposal, potentially qualifying for Business Asset Disposal Relief. Receiving loan notes instead of cash defers the tax point until the notes are redeemed, but the instrument must be carefully structured as either a Qualifying Corporate Bond or a non-QCB, because the two carry different capital gains tax consequences.

The category also matters because HMRC's anti-avoidance rules — in particular the Transactions in Securities legislation — apply across the full range of securities, not only shares. A transaction involving any of these instruments that HMRC believes has generated a tax advantage by converting income into capital can be challenged regardless of which type of security was involved.

Securities in a Private Company Context

Most founder-owned businesses will have issued only ordinary shares. But the capital structure can become more complex as a business grows, raises investment, or approaches a transaction. 

Preference shares may be issued to investors, carrying priority returns on exit. Loan notes may be used to structure deferred consideration payable by the buyer after completion. 

Options may have been issued to management under an EMI scheme and will need to be exercised or lapsed as part of the exit process.

Each of these is a security. Each interacts with the deal mechanics and the tax position differently. Understanding the full securities profile of the company — what has been issued, to whom, and on what terms — is a foundational part of deal preparation.

GRAX Connection

Raise: Investors typically receive preference shares or convertible loan notes — both securities — in exchange for capital. Understanding the security type is essential for modelling dilution and the exit waterfall before accepting investment.

Acquire: An acquisition may be structured as a share purchase, in which the acquirer buys the target's share capital, or an asset purchase. Where the acquirer issues its own shares or loan notes as consideration, those instruments are also securities with their own tax treatment for the recipient.

Exit: The form in which a seller receives proceeds — cash, loan notes, rollover equity in the acquirer — determines the tax point and the applicable rate. Each instrument is a security, and each requires separate analysis before the deal structure is agreed.

This content is for information only and does not constitute legal, tax, or financial advice. Always take professional advice before making decisions that affect your business or personal tax position.