CFM45170 - Deemed loan relationships: shares with guaranteed returns: non-qualifying shares: the income producing assets test

Income producing assets test

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

The purpose of the income producing assets test is twofold:

  • to exclude cases where there is no tax avoidance, and
  • to prevent multiple charges within groups of companies.

The schemes at which the increasing value condition are targeted are cases where the value of the shares is pre-ordained to increase in an interest-like manner due to the increasing value of the underlying assets of the issuing company. This will normally involve arrangements where the asset value of the special purpose vehicle (SPV) will be an agreed figure at an agreed future date. Typically, this will be achieved by an agreement that a certain amount of cash will be paid to the SPV or by the SPV acquiring an asset whose value will be known at that future date (e.g. the debt due as in scheme 2 at CFM45020). It will not be the case that the SPV will pay tax on interest income itself, since that would defeat the object of the scheme and would reduce the yield below that of a pre-tax interest return.

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Cases where taxable income arises in issuing company

The first category of assets that are treated as income producing are assets which themselves give rise to interest-like income but in a taxable form. The cases are those in CTA09/S527(4) (e) & (f): that is, repo arrangements which give rise to an interest receipt by virtue of CTA09/S543, and assets of the type described in CTA09/S494. This provision contains a list of asset types for the purposes of the non-qualifying investments test for certain collective investment schemes (see CFM43000). These include all the common interest-like investments such as money on deposit (which should be treated as covering money lent) and securities.

Where the issuing company has assets within CTA09/S494 which are denominated in a foreign currency, then that company will not be regarded as failing the ‘income producing assets’ test in S527(4) solely because it also holds a cross currency swap to hedge its foreign exchange exposure in respect of those assets.