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HMRC internal manual

Company Taxation Manual

HM Revenue & Customs
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Corporation Tax: company reconstructions: beneficial ownership

CTA10/S942 (8)

How common ownership of a trade can be established by looking through to the owners of a company’s ordinary share capital is described at CTM06020. The test operates by reference to the beneficial ownership of shares and not by reference to the name in which shares are registered. A person who holds shares as nominee for someone else is not a beneficial owner.

It is difficult to define ‘beneficial ownership’ precisely. Beneficial interest in shares normally passes from vendor to purchaser when an unconditional sale document is signed. But if a contract is subject to a condition precedent, then beneficial ownership does not pass so long as the condition remains unfulfilled.

On the other hand, the legal owner can lose the beneficial interest in shares by entering into an unconditional agreement to sell them in advance of signing a contract. An oral agreement can be an unconditional agreement.

There is a useful summary of how a contract can be concluded by correspondence in J H & S (Timber) Ltd v Quirk (1972) 48TC at the foot of page 608. This is particularly relevant when examining the timing of events in cases where avoidance is possible. There is guidance on avoidance at CTM06210.

Share options

Cross options over shares, which are also known as ‘put and call’ options, are in practical terms equivalent to an unconditional contract for sale. A cross option over shares occurs where:

  • A can insist at some stage on buying B’s shares, and
  • B can insist on A buying B’s shares.

But in law options over shares are different from an unconditional contract for sale. J Sainsbury Plc v O’Connor (1991) 64TC208 shows that the existence of options does not affect beneficial ownership.

In Wood Preservation Ltd v Prior (1968) 45TC112 the company failed to gain title to the unused losses of its former parent under what is now CTA10/S940A. This was because the transfer of trade occurred after that company lost the beneficial ownership of Wood Preservation’s shares. The judgements contain discussion on the meaning of beneficial ownership. But they need to be read in the light of the comments made on them in the Sainsbury case. Putting the two cases together it appears that, in the absence of an unconditional contract for sale, an owner does not lose beneficial ownership of shares unless in all the circumstances they retain no more than the mere legal shell of ownership.

Liquidations and Receiverships

When a company goes into liquidation it ceases to be the beneficial owner of its assets, which include shares in other companies. This was shown in Ayerst v C & K (Construction) Ltd (1976) 50TC651. So CTA10/S940A is not applicable where a company in liquidation transfers a continuing trade to a subsidiary.

But CTA10/S940A is applicable if a continuing trade is transferred to another company whose ordinary share capital is owned by sufficient of the shareholders of a company in liquidation to meet the 75 per cent common ownership of a trade test within the three-year time frame set out in CTM06010.

A company to which a receiver or administrative receiver is appointed does not lose the beneficial ownership of shares it owns in other companies.