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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Deemed loan relationships: disguised interest: excluded shares: ‘involves only’

Meaning of ‘involves only’

CTA09/486E(3) sets out that, for the purposes of S486E an arrangement ‘involves only’ relevant shares if (and only if) the return produced reflects only an increase in the fair value of the shares.

This definition of ‘involves only’ is important as it prevents any returns from arrangements, other than those arrangements that the excluded shares exemption is intended to prevent from being within the disguised interest rules, from being taxed within the disguised interest rules.

In this context, ‘only’ should be interpreted strictly although legislation makes clear that the payment of a dividend will not affect the question of whether the requirement is met. Similarly, if the shares are sold for their fair value, the return has already been produced so the disposal itself does not prevent the return reflecting only the increase in the fair value of the share.

The fair value of shares is the amount that a company would obtain from a knowledgeable and willing purchaser of the shares dealing at arms length (CTA09/486E(4)).

Hedging arrangements

A company that holds shares that produce an interest like return may enter into a hedging arrangement to convert that interest-like return into a different interest-like return. For example, an interest rate swap converting a fixed interest-like return into a floating interest-like return. As both returns are economically equivalent to interest, such arrangements will not prevent the excluded shares rule from applying.