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HMRC internal manual

Company Taxation Manual

Investment trusts: conditions for approval: 15 per cent holding

{#IDAUFZXG}ICTA88/S842(1)(b), (1A), (2) and (3)

The company must not have a holding in another company that represents more than 15 per cent by value of the investing company’s investments (including bank deposits). But the 15 per cent restriction does not apply to holdings in companies that are themselves approved investment trusts, or would qualify as such apart from the listing requirement at section 842(1)(c).

You should ask the company to supply for each accounting period a certificate showing the name and registered office of any company the holding in which represents more than 15 per cent by value of the claimant company’s investments.

{#IDAXHZXG}Meaning of holding

Section 842(3)(a) defines ‘holding’ as the shares or securities, whether of one class or more than one class, held in any one company. So the values of different classes of shares and securities in one company are amalgamated for the purposes of the 15 per cent test.

Section 842(1A) expands the definition in relation to groups and does two things. First, where the investment trust has holdings in several companies that are members of a group, section 842(1A)(a) treats all of those holdings as if they were a holding in a single company. Thus a company with holdings in a number of subsidiaries (whether subsidiaries of itself or a third company), each of which is worth less than 15 per cent of the company’s investments, cannot be an approved investment trust if the total value of the holdings in the subsidiaries exceeds 15 per cent of the holding company’s investments.

Second, where the investment trust is a member of a group and is owed money by other members of that group, section 842(1A)(b) treats those debts as securities. This means that the debt is treated as a holding for the purposes of the 15 per cent test, countering schemes whereby the value of a holding company’s shares in subsidiaries is kept below 15 per cent but the true worth is represented by debt owing to the holding company.

‘Group’ for the purposes of section 842 means a company and all of its 51 per cent subsidiaries, as defined at section 838 ICTA 1988.

Section 842(3)(c) deals with schemes of reconstruction and amalgamation (see CG52500+). Where the investment trust acquires shares or securities in a company without having to give consideration, by reason of and in proportion to its holding of shares or securities in another company, then the original shares and the new shares are treated as the same holding.

{#IDAVHZXG}Increases in value and additions to holdings

Section 842(2) provides that the 15 per cent restriction does not apply to:

  • a holding in a company acquired before 6 April 1965 which on that date represented not more than 25 per cent by value of the investing company’s investments; or
  • a holding in a company which, when it was acquired, represented not more than 15 per cent by value of the investing company’s investments,

provided no addition has been made to the holding.

This recognises that an investment trust’s holding in a company may appreciate in value relative to the other investments of the investment trust and ensures that, where the holding has not been added to, such relative appreciation will not breach the 15 per cent condition and jeopardise the investment trust’s approved status.

If a company has a holding which, at 6 April 1965 or at the date of acquisition, exceeded the percentage limits, it may dispose of part of the holding to bring the reduced holding within the 15 per cent limit. So long as no addition is made to the holding, approval should not be withdrawn for any subsequent accounting period solely because the reduced holding has appreciated relative to the other investments so that it exceeds 15 per cent of the company’s investments.

Section 842(3)(b) describes what is meant by an addition being made to a holding. An addition is made when shares or securities are acquired, except where they are allotted without consideration being given for them (i.e. a bonus issue). And if an addition is made to a holding, that holding is deemed to be acquired when the addition or latest addition is made to it.