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HMRC internal manual

Corporate Finance Manual

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

Overview of legislation: two types of scheme

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

The legislation is now in CTA09/PT6/CH7, at sections 522 to 535.

Shares subject to outstanding third party obligations

CTA09/S524 to S525 deal with cases where shares are subject to ‘outstanding third party obligations’, and the shares are an ‘interest-like investment’. This is a narrowly targeted measure that deals with scheme 1 set out at CFM45020. This legislation was originally at FA96/S91A.

Non-qualifying shares

CTA09/S526 to S533 deals with certain other cases where a share (or a share and one or more associated transactions) gives rise to an interest-like return. This legislation was originally at FA96/S91B. It applies to a share:

  • which is a ‘non-qualifying share’ (CFM45110),
  • which is not within CTA09/S490 (holdings in unit trusts, OEICS and offshore funds which fall to be treated as rights under a creditor loan relationship), and
  • to which, at no time during the times when the above conditions apply, (or for accounting periods ending before 22 March 2006, in the accounting period) does CTA09/S524 apply in relation to the investing company.

CTA09/S526 provides that a share is a ‘non-qualifying share’ if:

  • CTA09/S130 does not apply to distributions in respect of the share (because if that were the case, any dividends and increases in value would be taxed as part of a financial trade), and
  • one or more of the following three conditions is satisfied.

S527 the increasing value condition: this condition requires that the assets of the issuing company are of such a nature that the fair value of the share is likely to increase in an interest-like manner. This would cover scheme 2 outlined at CFM45020 above, and other similar schemes.

S529 the redemption return condition: this condition requires that the share is redeemable, and is designed to produce an interest-like return. This would cover preference share lending or investment schemes.

S532 the associated transactions condition: this condition requires that there is a scheme or arrangement under which the share and one or more associated transactions are together designed to produce an interest-like return. This will cover more complex schemes where the share itself does not give an interest-like return, but is packaged with, say, a derivative contract such that the combined effect is to give an interest-like scheme. In some ways, these schemes are similar in effect to the guaranteed return schemes to which (in periods of account beginning before 1 January 2005) FA02/SCH26/PARA6 applied.