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HMRC internal manual

Corporate Finance Manual

Deemed loan relationships: shares with guaranteed returns: non-qualifying shares: definition of income producing assets

Income producing assets test: definitions

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

The ‘income producing assets’ test provides a let out from S527. S527(3) provides that the increasing value condition is not satisfied if the whole or substantially the whole of the assets of the issuing company are income producing.

S527(4) provides an exhaustive list of assets which are ‘income producing’ for the purposes of S527. These are -

  • any share within S524;
  • any share itself within the increasing value condition of S524, or would be but for the income producing assets test;
  • any share within the ‘redemption condition’ in CTA09/S529, or which would be within that section but for being an ‘excepted share’;
  • any share within the ‘associated transactions condition’;
  • any asset described in CTA09/S494(1);
  • rights under a repo to which CTA09/S543 applies (see CFM46000);
  • any share in a company the whole or substantially the whole by fair value of whose assets are assets within the preceding categories.

The Treasury is given a regulatory power to add to the list of income producing assets.

The aim of this test is to exclude non-avoidance cases and multiple charges within groups of companies. The test is intended to exclude companies whose assets are all income producing, but has been framed so that a small amount of non-income producing assets will not taint a company. The comparison is to be made by reference to the fair value of assets, not by the amount of income they produce.

In practice, an avoidance scheme will involve a company with very high percentages of non-income producing assets. Where a company claims it is not caught by S527 because ‘substantially the whole’ of the assets of the issuing company are income producing, each case should be considered on its merits. But where a company claims that the let out applies and the fair value of the income producing assets is less than 95% of the fair value of the total assets, HMRC staff should seek advice from CTIAA (Financial Products Team).