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HMRC internal manual

Corporate Finance Manual

Loan relationships: what are loan relationships: exclusion of rights conferred by shares

CTA09/S303(4)

CTA09/S303(4) specifically provides that debts arising from rights conferred by shares in a company are not treating as arising from the lending of money. Thus such a debt should not give rise to a loan relationship.

So, if the subscription issue in respect of a new share issue provides that the capital is to be subscribed in stages, any debt so created will not give rise to a loan relationship.

Shares with economic similarities to debt instruments

Some shares have similar characteristics to debt, such as redeemable fixed rate preference shares. These shares

  • are stated to be redeemable
  • offer a fixed return on capital.

Accordingly, the cash flow looks more like an investment by way of a loan than a subscription of share capital. CFM31080 gives an example. However, because the investor’s right to dividends and to return of capital on redemption are conferred by shares, the investor’s shareholding will not be a creditor loan relationship.

However, amounts may be brought into account under CTA09/PT5 by virtue of PT6. The relevant rules have been subject to change over time. Under current rules, the investor’s return on such shares would be taxed as “disguised interest” under S486B. Guidance on these rules begins at CFM42000.

Looking back at the history, “shares with guaranteed returns” legislation was introduced by FA (No 2) 2005, which became CTA09/PT6/CH7 to bring certain shares, and arrangements involving shares, into the loan relationships legislation where they give a return similar to the return on a debt. This legislation was repealed with effect from 22 April 2009. Guidance on the repealed provisions begins at CFM45000.

Debt with economic similarities to equity

Some debt has similar characteristics to shares, for example where the creditor’s return is linked to the increase or decrease in the value of a company’s shares. In some cases these may be treated for accounting purposes as debt instruments with embedded derivatives or equity instruments and special rules apply. The main guidance starts at CFM37600.