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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Deemed loan relationships: shares with guaranteed returns: outline of legislation

Overview of legislation

This guidance applies to companies that hold shares up to 21 April 2009

In outline, the legislation applies where a share held by a company (the ‘investing company’) on or after 16 March 2005 gives rise to an interest-like return. There are a number of conditions to be satisfied, but where those conditions are satisfied, the effect of the legislation is that:

  • the loan relationships regime applies as if the share were rights under a creditor relationship of the investing company
  • any distribution in respect of the share made before 9 October 2007 were not a distribution falling within ICTA88/S209(2)(a) or (b)
  • any distribution in respect of the share made on or after 9 October 2007 were not a distribution falling within any part of ICTA88/S209(2)
  • any debits or credits brought into account by the investing company must be determined on the basis of fair value accounting
  • For amounts in relation to accounting periods ending on or after 12 March 2008, and only in connection with debits that relate to any time on or after that date, no debits are to be brought into account by the investing company as respects the share. The only exception to this rule relates to instances where there are associated credits brought into account under CTA09/CH7 and further detail of this exception can be found at CFM45120.

‘Fair value accounting’ and ‘fair value’ are both defined at CTA09/S313.

For shares held prior to 6 March 2007, ‘share’ was defined at FA96/S103(1). Thereafter ‘share’ takes its more general meaning with the exception that it does not include a share in a building society.

Note that the legislation says nothing about the issuer of the share, so the tax position of the issuing company is not affected by this legislation. In particular, no relief is given for the cost of any dividends paid.