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HMRC internal manual

Corporate Finance Manual

Deemed loan relationships: shares with guaranteed returns: non-qualifying shares: the associated transactions condition

CTA09/S532: the associated transactions condition

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

CTA09/S532 sets out the third condition for S526. It caters for cases where a share by itself does not give an interest-like return, but the share is combined with other transactions which together are designed give such a return. The intention is to catch variations on the types of scheme caught by the guaranteed return measures.

CTA09/S532 provides that the condition is that there is:

  • a scheme or arrangement
  • under which the share and one or more associated transactions (see CFM45260)
  • are together designed to produce a return which equates in substance to the return on an investment of money at a commercial rate of interest (see CFM45090).

For times on or after 12 March 2008 an amendment in Finance Act 2008 made it clear that it is not necessary for the investing company to be party to the scheme or arrangement and confirms that CTA09/S532 can still apply even if the return is spread between more than one person. While this amendment has effect in relation to all times on or after 12 March 2008 it was inserted to clarify the position and HMRC consider that CTA09/S532(1) should be interpreted in that manner before that date.

The associated transactions condition is not satisfied if the share is within either:

  • the increasing value condition (S527), or would be apart from the income producing assets let out, or
  • the redemption return condition (S529), or would be apart from the excepted shares let out.

The purpose of these two exceptions is to ensure that S532 only applies to schemes where both the share and the associated transaction(s) are an integral part of producing the interest-like return. So if the share by itself gives an interest-like return, then that share cannot be caught by S532. This is important as the associated transactions condition has no filters at all.

So if a redeemable preference share paid, say, fixed dividends of 5% per year, it might be caught by the redemption return condition. But if the share was not held for an unallowable purpose, then S529 would not apply to it. If in addition as part of the arrangement the investing company entered into a swap to convert the fixed 5% return into a floating LIBOR based return, S532 will not apply because the share would have been within S529 but for being an excepted share. This enables the redemption return condition filters to continue to apply.

But the principle goes wider than the statutory exemption. If the share in the example above was not redeemable, the share could never be within S529. But S532 could not apply either, since the share itself gives rise to an interest-like return. This arises from the wording of S532(1), which provides that ‘…there is a scheme or arrangement under which the share and one or more associated transactions are together designed to produce a return…’.