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HMRC internal manual

Company Taxation Manual

Groups & consortia: groups - entitlement to profits or assets available for distribution: definitions of terminology

CTA10/PART5/Ch6/S158, 160, 162, 167

Connected persons

Any question whether one person is connected with another is determined in accordance with CTA10/S1122 (see CG14620 onwards).

Equity holders

The definition of an equity holder is at CTA10/S158(1).

An equity holder is any person who:

  • holds ordinary shares in the company, or

 

  • is a loan creditor of the company in respect of a loan that is not a normal commercial loan. (For this purpose, ordinary shares are all shares other than restricted preference shares. ‘Restricted preference shares’ are defined below.)

    There is further guidance at CTM81025 on the treatment of certain persons as equity holders and on the treatment of a bank as an equity holder at CTM81030.

    Equity holder as such

    ‘Equity holder as such’ is not specifically defined in CTA10/PART5/Ch6. Something is received by an ‘equity holder as such’ when an equity holder receives it in his or her capacity as an equity holder. That is to say dividends, interest and assets in a winding-up in respect of shares or securities in respect of which he or she is treated as an equity holder.

    In contrast, someone who is, for example, an equity holder in respect of a holding of ordinary shares may receive interest in respect of a loan that is a ‘normal commercial loan’. Although the equity holder will receive this interest, it will not be received by the equity holder ‘as such’.

    Restricted preference shares

    The definition of restricted preference shares is at CTA10/S160(2). For the purpose of the definition of ‘equity holder’ above, the definition of restricted preference shares is shares which:

 

  • are issued for consideration which is, or includes, new consideration (see below), and

 

  • do not carry any right either to conversion into shares or securities of any other description, or to the acquisition of any additional shares or securities. This is subject to certain exceptions described at CTM81015), and

 

  • do not carry any rights to dividends other than dividends which:
    • are of a fixed amount, or at a fixed rate per cent of the nominal value of the shares, and
    • represent no more than a reasonable commercial return on the new consideration received by the company in respect of the shares, and

 

  • on repayment do not carry any rights to an amount exceeding that new consideration, except in so far as those rights are reasonably comparable with those general for fixed dividend shares listed on arecognised stock exchange. Shares that carry no rights to a dividend may be restricted preference shares for the purposes of the definition in CTA10/S160. They are, however, ordinary share capital for the purposes of CTA10/S1119.

    Because of the condition, in the first bullet above, that restricted preference shares are issued for consideration which is, or includes, new consideration, a bonus share (for which no new consideration is received by the company) cannot be a ‘restricted preference share’ even if the conditions in the other three bullets above are satisfied.

    Indirect shareholdings etc

    CTA10/S167(2) provides that the percentage to which one company:

 

  • is beneficially entitled of any profits available for distribution to the equity holders of another company, and
  • would be beneficially entitled of any assets of another company on a winding-up, means the percentage to which the first company is, or would be, so entitled, either:

 

  • directly, or

 

  • through another company or other companies, or

 

  • partly directly and partly through another company or companies. Loan creditor

    ‘Loan creditor’ is defined in CTA10/S158(2), for the purpose of the definition (above) of an equity holder, as any person who is a creditor of the company in respect of any redeembable loan capital issued by the company; or in respect of a debt incurred by the company for:

     

 

  • any money borrowed or capital assets acquired by the company,
  • any right to receive income created in favour of the company, or
  • consideration for which the value was substantially less than the amount of debt.  

There is no exclusion of banks in the definition of loan creditor.

New consideration

New consideration is defined in CTA10/S1115 (CTM15140).

Normal commercial loan

A ‘normal commercial loan’ means a loan that satisfies all the following conditions.

  • It is a loan of, or including, new consideration (see above). (It follows that a bonus security for which the company receives no new consideration cannot be a ‘normal commercial loan’.)
  • It does not carry any right either to conversion into shares or securities of any other description (this is subject to certain exceptions described at CTM81015), or to the acquisition of any additional shares or securities.
  • It does not entitle the loan creditor to any amount by way of interest which depends to any extent on:
    • the results of the company’s business or any part of it, or
    • the value of any of the company’s assets, or
    • which exceeds a reasonable commercial return on the new consideration lent. (This sub-paragraph operates subject to the two modifications at CTM81020, which refers to the comments of the then Financial Secretary to the Treasury on these provisions when they were introduced.)

 

  • The loan creditor is entitled on repayment to an amount which either:
    • does not exceed the new consideration lent, or
    • is reasonably comparable to the amount generally repayable, in respect of an equal amount of new consideration, under the terms of issue of securities listed on a recognised stock exchange. As far as possible, similar securities should be selected for comparison, for example, indexed securities should be compared with quoted indexed securities.

      Ordinary shares

      Ordinary shares means all shares other than restricted preference shares (see above) (CTA10/S160).

      Securities

      A loan to a company is to be treated as a security whether or not it is a secured loan. If it is a secured loan to a company, it is treated as a security regardless of the nature of the security.