Convertible Loan Note (CLN) Tax Calculator

A CLN is a debt instrument that gives the holder the right to convert the loan into shares (usually ordinary shares) at a specified price or at a specified event (e.g., next funding round, exit, or maturity). It pays interest and can be repaid at par if not converted.

A Qualifying Corporate Bond (QCB) is exempt from CGT on disposal. A CLN is a QCB if it's denominated in sterling, does not carry excessive interest, and has no equity-linked redemption terms that make it akin to shares. Non-QCBs are chargeable to CGT on any gain on conversion or redemption.

Yes. Interest accruing on a CLN is taxable as savings income (or employment income if connected with your employment), typically taxed at your marginal income tax rate. Interest may be taxed on a cash basis (when paid) or accruals basis depending on the circumstances.

For a QCB: the conversion is a disposal exempt from CGT; your CGT base cost in the shares becomes nil (any gain crystallises when you later sell the shares, not on conversion). For a non-QCB: conversion is a disposal — the difference between the market value of shares received and the CLN base cost is a chargeable gain.

Non-QCBs can potentially qualify for BADR on disposal if conditions are met (trading company, relevant stake). A QCB conversion itself is exempt from CGT, but the subsequent share disposal may qualify for BADR if the shares acquired meet the qualifying conditions.

If the CLN is a QCB and the company fails: no CGT loss is available (QCBs are exempt from CGT, so losses are also blocked). For non-QCBs, a loss may be available. HMRC form S256 'negligible value' claim may apply if the CLN becomes worthless.

CLNs are widely used by angel investors and VCs for early-stage investment because: valuation is deferred until a priced round, downside protection through debt, potential SEIS/EIS income tax relief on the initial investment (though EIS rules have restrictions on 'structured finance' that may affect CLNs), and conversion rights.

CLN interest should be reported on SA101 (Additional Information supplement) under 'Other income'. If the interest is connected to an employment relationship, it may need to be included on the employment pages instead. HMRC may require evidence of whether interest is paid or rolled up (PIK).