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HMRC internal manual

Corporate Finance Manual

Deemed loan relationships: shares with guaranteed returns: non-qualifying shares: application of the increasing value condition

What sort of companies will S527 apply to?

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

The test for S527 is 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.

This means that a share is not caught just because its rate of value increase happens for any period to arithmetically equal a commercial rate of interest. It follows that the only companies likely to be caught are companies whose assets are wholly or substantially wholly interest bearing, and companies whose value increase is pre-determined by the nature of the agreements surrounding it. The latter category will be the norm for the type of avoidance schemes at which this measure is aimed. The first category of companies (some group finance companies and companies whose only assets are cash on loan) would be let out by the ‘income producing assets’ test.

S527 will not apply to ordinary shares issued by genuine trading companies (including normal commercial finance leasing companies). That is because if there are a variety of transactions with receipts and expenses of differing amounts, it is only going to be by chance that the value of the shares increases in an interest-like way.

For the same reasons, the increasing value condition will not apply to preference shares issued by trading companies, unless their terms are such as to entitle them to participate in a share of profits on a winding up which increases in an interest-like way (which would be a highly artificial arrangement). But the redemption return condition could apply if the shares are redeemable and pay interest-like dividends.