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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: non-qualifying shares

Non-qualifying shares: CTA09/S526

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

Whereas CTA09/S524 deals with a specific scheme involving outstanding third party obligations over shares, CTA09/S526 deals with other possible avoidance schemes which attempt to convert interest into some form of return on a share.

The section applies for CT purposes in relation to a company if at any time in an accounting period:

  • the company (‘the investing company’) holds a share in another company (‘the issuing company’),
  • the share does not fall to be treated for that accounting period by virtue of CTA09/S490 (holdings in certain types of investment fund) as if it were rights under a creditor relationship of the investing company (see CFM43000),
  • the share is a non-qualifying share, and
  • at no time in the accounting period does CTA09/S524 apply to the share.

For accounting periods ending before 22 March 2006 the section applies if the conditions are met ‘at any time’ in an accounting period. However, the effect of the transition rules in FA96/S91G (CFM45290) is that only increases in value between the dates the share starts and ceases to satisfy the conditions are brought into account for loan relationships purposes. For accounting periods ending on or after 22 March 2006 S91A (1) makes it clear that the section applies ‘in relation to the times in a company’s accounting period during which’ the conditions are met and where, during those times, S91A does not apply.

Where the section applies, the loan relationships rules have effect for the accounting period of the investing company (during those times for accounting periods ending on or after 22 March 2006) as if -

  • the share were rights under a creditor relationship of that company, and
  • any distribution in respect of the share were not a distribution falling within ICTA88/S209(2)(a) or (b).

The reason a distribution (such as a dividend) is treated as not being a distribution is to override CTA09/S465 which prevents a distribution from being taken into account for the purposes of loan relationships.

Note that the consequences of S526 applying are the same as when S524 applies.