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HMRC internal manual

Corporate Finance Manual

Interest restriction: related parties: meaning of 25% investment

TIOPA10/S464

The 25% investment condition is one of the three conditions in the general rule of a related party.

A person (P) will have a 25% investment in another person (C) if any of the following are met:

  • P possesses, or is entitled to acquire, 25% or more of the voting power in C.
  • In the event of a disposal of the whole of the equity in C, P would receive 25% or more of the proceeds.
  • In the event that the income in respect of the equity in C were distributed among the equity holders in C, P would receive 25% or more of the amount so distributed.
  • In the event of a winding-up of C, or in any other circumstances, P would receive 25% or more of C’s assets which would then be available for distribution among the equity holders in C in respect of the equity in C.

It should be noted that the three tests of economic rights concern the rights of the investor in respect of their equity interests in C.

Meaning of equity

References to equity in C are to:

  • shares in C other than restricted preference shares
  • loans to C other than normal commercial loans.

Shares include stock and any other interests of members in C. So, for example, the 25% investment test can be met with a company that does not have share capital by considering all of the interests of the members in the company.

Where C is not a company, or does not have share capital these definitions have effect with the necessary modifications.

Indirect rights

References to a person receiving any proceeds, amount or assets includes both the direct or indirect receipt by that person and the direct or indirect application of them for that person’s benefit. It does not matter whether the receipt or application is at the time of the disposal, distribution, winding-up or other circumstances, or at a later time.  However, this does not apply to rights arising purely as a result of a person being a party to a normal commercial loan.

Where a company A has rights over any proceeds, amount or assets and another person (B) holds an equity in A, then B is treated as having indirect rights to the proceeds, amount or assets that arise for the benefit of A in proportion to B’s equity interest in A.

Any reference to proceeds, amount or assets of a person who is in a partnership includes a reference to the person’s share of the proceeds, amount or assets of that partnership determined by apportioning between the partners on a just and reasonable basis.

Attribution of interests and rights

The definition of 25% investment looks at the level of investment P has in an entity. In considering the above tests, P will be considered have certain attributed rights and interests in the following cases:

  • Connected persons
  • Persons acting together
  • Qualifying arrangements