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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: the ‘increasing value condition’

CTA09/S527: the increasing value condition

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

CTA09/S527 sets out the first condition for S526, the increasing value condition. This caters for cases where the value of a share is designed to increase in an interest-like manner by means other than use of outstanding third party obligations (which is dealt with by S524).

Commercial rate of interest

CTA09/S527(1) provides the basic rule, which is that the assets of the issuing company are of such a nature that the fair value of the share -

  • is likely to increase at a rate which represents a return on an investment of money at a commercial rate of interest (see CFM45090), and
  • is unlikely to deviate to a substantial extent from that rate of increase.

In determining whether the rate has deviated to a substantial extent, fluctuations arising from changes in exchange rates are to be left out of account.

For all times on or after 12 March 2008 fluctuations arising from changes in exchange rates are also left out of account when considering whether the fair value of the share is likely to increase at a rate which represents a commercial rate of interest.

See CFM45090 for further comments on whether there is a commercial rate of interest.

Assumption

In determining whether this condition is met, S527(5) provides an assumption that no transaction (or series of transactions) intended to prevent the share being an interest-like investment will be entered into by the investing company.

For all times on or after 12 March 2008 the assumption also covers any transactions that have been entered into as well as any transactions that will be entered into by the investing company. This rule applies to transactions entered into by any company and not just those transactions entered into by the investing company.

The same principles apply here as set out at CFM45080 in relation to the equivalent S524 provision.

Where such a transaction is entered into, no debits are to be brought into account in respect of it.