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HMRC internal manual

International Manual

Arbitrage: legislation and principles - qualifying schemes for deductions cases: schemes involving hybrid instruments and a connected party

A scheme may also be a qualifying scheme if an effect equivalent to the use of a hybrid entity is achieved through the use of a hybrid instrument and/or transactions between connected persons.

There are two categories of qualifying scheme involving hybrid effect but that require the involvement of a connected person:

Shares not conferring a qualifying beneficial entitlement

These are shares which do not confer a beneficial entitlement to profits available for distribution or to any assets available for distribution on winding up that is not in proportion to the proportion of issued share capital represented by that share.

There may also be an understanding that, following issue of shares that are ordinary shares which confer the normal beneficial entitlements, the rights attributable to those shares will be altered so that the holder loses some or all of the beneficial entitlement to those rights. In these circumstances such shares would be shares not conferring a qualifying beneficial entitlement. (S241 TIOPA 2010).

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Transfer of rights

A scheme is a qualifying scheme if the rights to income or gains arising from a security are split between two or more connected persons as a result of a transaction or series of transactions (S242 TIOPA 2010).