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HMRC internal manual

Corporate Finance Manual

From
HM Revenue & Customs
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Deemed loan relationships: shares accounted for as liabilities: entering into and falling out of the rules

Entering into and falling out of the rules

There are special rules that apply when a company holds shares and those shares either enter into or cease to fall within the shares accounted for as liabilities rules (CTA09/521F). This could be because of a change in accounting treatment, the fact that the shares begin or cease to have an unallowable purpose or an alteration to connected party status.

When this occurs, the company holding the shares, is treated as:

  1. disposing of the shares immediately before the share enters into the rules or falls out of the rules (as appropriate) at a value equal to the notional carrying value of the shares at that time, and
  2. immediately reacquiring the shares at the same consideration.

Notional carrying value

The ‘notional carrying value’ is defined as being the same amount that would have been the carrying value of the shares in investing company’s accounts if a period of account had ended immediately before the shares began or ceased (as appropriate) to be treated under the shares accounted for as liabilities rules.

The overall effect should be that the acquisition value of the deemed loan relationship should generally be the accounts carrying value of the shares and the deemed disposal should generally be for the same amount. In normal circumstances, the accounts carrying value will be the same as the tax carrying value.

Capital gains treatment

The capital gains treatment of shares falling into and out of these rules will follow TCGA92/S116B. These rules are identical to those that related to the previous “shares as debt” regime in FA96/S91G(2).

This states that for capital gains purposes the company is deemed to have disposed of the shares immediately before the share entered into the shares as liabilities rules for a consideration equal to the fair value of the shares at that time and then to have immediately reacquired the shares for a consideration of the same amount.