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HMRC internal manual

Company Taxation Manual

Distributions: general: preference share lending

Distribution income received by a company is not liable to CT. Accordingly such income is more attractive to an investing company than assessable income. That company will therefore seek to receive its income as distribution income if it has a choice. A situation where this might arise is where a borrowing company has no taxable profits; it might have the same borrowing cost whether it paid loan interest as interest or in the form of a distribution. If the borrower were to co-operate with the investing company in order to provide non-taxable distribution income, it would expect to benefit by way of lower finance costs.

One way in which loan interest can effectively be converted to a distribution by way of a dividend is for the loan to take the form of a subscription for fixed- or variable-rate preference share capital in the borrowing company. That company then pays a dividend rather than interest.

BAI (Technical) continues to monitor the use of devices of this kind. (This content has been withheld because of exemptions in the Freedom of Information Act 2000)