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HMRC internal manual

Corporate Finance Manual

Deemed loan relationships: shares accounted for as liabilities: the legislation

Overview of legislation

The rules relating to the tax treatment of shares accounted for as liabilities mean that, under certain circumstances, certain shares are treated as rights under a creditor relationship of the company holding the shares and, hence, will be taxed under the loan relationships regime.

The primary requirement that must be met is that, in accordance with generally accepted accounting practice, the share would be accounted for by the issuing company as a liability (CTA09/S521C(1)(a). This means generally accepted accounting practice as defined by FA04/S50 and therefore refers to either IAS32 or the UK equivalent FRS25.

The further requirements that must be met are:

  • The company holding the shares and the company issuing the shares must not be connected. For these purposes, the meaning of connection is that used for loan relationships at CTA09/S466.
  • The shares must produce, for the holder, a return that is ‘economically equivalent to interest’ (CFM45540).

The share held is not one that is specifically exempted (CFM45550).

The share must not be held for an ‘unallowable purpose’ (CFM45560).

Shares that are already treated as rights under creditor loan relationships by virtue of CTA09/S490 cannot fall within the shares accounted for as liabilities rules. This relates to holdings of shares by OIECS, unit trusts and offshore funds.

Definition of ‘share’

The definition of ‘share’ for the purposes of the shares accounted for as liabilities rules is not the same as that which normally relates to loan relationships at CTA09/S476(1). There is no definition of share for these purposes apart from the fact that it does not include a share in a building society. This is because such shares are already treated as loan relationships.

Repo shares

Shares that are held under a repo transaction (CFM46000) should not, for the purposes of these rules, be treated as being held by a company.

This is to prevent the holder of the shares from being able to benefit from any of the exclusions relating to the shares treated as liabilities rules (for example, the connected party exclusion) that depend on a company holding the shares. In such a case, it is possible that the rules relating to ‘disguised interest’ at CTA09/S486A-E (CFM42000) may apply in relation to the share because any interest-like return does not arise solely from the ownership of the shares.