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HMRC internal manual

Corporate Finance Manual

Deemed loan relationships: shares accounted for as liabilities: introduction


Certain types of share can be accounted for as a financial liability rather than equity and this can give rise to specific tax issues. This would typically relate to preference shares that are redeemable and non-participating or fixed rate.

Such preference shares are, in substance, performing a debt function and hence are quasi-loans. Where that is the case, the accounting will usually follow the substance and therefore the shares would be shown in the accounts as a financial liability.

The tax rules for preference shares accounted for as liabilities seek to ensure that any interest-like return from such shares will be taxed under the loan relationship rules. While the target for these rules is specified towards a certain type of share, the general concepts of the treatment and identification of interest-like returns follows those in the ‘disguised interest’ rules at CTA09/S486A-E (see CFM42000).

‘Shares as liabilities’ and ‘shares as debt’

While there are a number of key differences, the tax rules for shares accounted for as liabilities in CTA09/S521A-F are, in the main, the successor to the rules relating to redeemable shares at FA96/S91D (CFM45000) and have been brought in along with the ‘disguised interest’ rules at CTA09/S486A-E (CFM42000).

The background to bringing in new legislation to deal with avoidance schemes that involve non-participating or fixed rate redeemable preference shares is the same as that for the more general ‘disguised interest’ rules. However, the complications of such shares mean that they are best dealt with within separate legislation.

The fundamental premise is that, unless certain exceptions are met, any shares accounted for as a liability will be taxed as though they are a liability. Hence, any return from those shares will be taxed within the loan relationships regime. Key to this regime therefore lies in the exceptions and this guidance will cover those exceptions in detail.

The fact that the accounting treatment is the main feature of identifying such shares is a marked alteration from the ‘shares as debt’ approach to identifying relevant shares (which used the concept of ‘redeemability’ as the main feature required). However, it will still continue to cover many shares which are redeemable in accordance with their terms.