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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.

CTISA (Technical) continues to monitor the use of devices of this kind. Officers should report any case where there has been a new issue of preference shares to the value of £5m or more, (see ’Technical Help’ on the left bar). This report should contain the following information:

  • the office which deals with the issuer,
  • the issuing company,
  • the subscribing company,
  • the date of the issue,
  • the number of shares,
  • their par value plus any premium paid,
  • whether they are redeemable shares and, if so, the redemption terms,
  • the rate of dividend,
  • any special features of the scheme such as:

    • features which suggest that they are not straightforward preference share lending schemes or, indeed, that preference share lending is not the main purpose of the scheme,
    • the terms of any guarantee and any other special features,
    • anything else you might think relevant.