CFM42140 - Deemed loan relationships: disguised interest: excluded shares

CTA09/S486E

Excluded shares

The disguised interest rules will not apply where the arrangement involves an investment in shares and the share is ‘excluded’ by CTA09/S486E.

The intention behind the excluded share rules is that it will prevent arrangements being caught by the disguised interest rules where the interest-like return arises to a company purely as a result of an increase in the value of any share that it holds in a group company.

Without this rule, it would be possible for a single interest-like return to be taxed repeatedly within a chain of companies in the same group.

Example

Company A holds 100% of the share capital in Company B. Company B holds 100% of the share capital in Company C and has no other assets. All companies are UK resident.

In the year ended 31 December 2009 Company C has no assets other than a £100m deposit with a bank at an interest rate of 5% p.a.

Company C receives £5m interest in the year ended 31 December 2009 and that income is relieved by non-trading debits on loan relationships brought forward. The fair value of the shares held by Company B in Company C will also increase by £5m as compared to a previous fair value of £5m. This would be a ‘return economically equivalent to interest’ and potentially could fall within the disguised interest rules. Similarly, the increase in the fair value of Company B’s shareholding in Company C will cause a similar increase in the fair value of Company A’s shareholding in Company B. Consequently, Company A will have a return on its shares in Company B that would potentially be within the disguised interest rules.

The impact of this chain is that both Company A and Company B could potentially be taxed on a return that has already been brought into account by Company C.

The ‘excluded share’ rules will prevent the same economic gain from being taxed repeatedly within group situations. In the above example it would mean that Company B’s holding would be excluded if the return Company B obtains is an increase in value of the Company C shares. Company A’s holding is excluded if its return is an increase in the value of the Company B shares.

It achieves this by ensuring that:

  • investments in shares in connected companies are automatically ‘excluded shares’;
  • investments in shares in joint venture companies are automatically ‘excluded shares’;
  • investments in shares in a ‘relevant CFC’ are automatically ‘excluded shares’

CFM42130 to CFM42160 looks at the rules in greater depth.