MTT17060 - Scope: Determining ownership of entities: Calculating percentage ownership interest held by a class

For some provisions of MTT, it is necessary to determine the aggregate percentage ownership interest, including direct and indirect interests, that a certain class of entity holds in an entity. An example is when testing whether an entity is an investment entity under section 236(3)(c)(i) of Finance (No.2) Act 2023 or when testing whether an entity is a partially owned parent member under section 237(1)(c) of that act.

A rule is required to ensure that both the direct and indirect interests held by the relevant individuals or entities are considered, and to prevent the double counting of interests.

This is set out in Section 244 of Finance (No.2) Act 2023.

Excluded entities

This rule does not apply when assessing the percentage ownership interest held in an entity by excluded entities. See MTT17070 for the rule which applies in such cases.

The rule

To determine the percentage ownership interests in an entity (“A”) held by a class of entities (“B”):

Step 1: Ignore indirect interests held by individuals or entities that are not members of B.

Step 2: Ignore indirect interests held via an entity that is a member of B.

Step 3: If a member of B has an indirect interest in A that has not been ignored under a previous step, reduce the direct interest through which it is held by the amount of the indirect interest.

The total interests recognised will always add up to 100%.

Example

It is necessary to determine whether A Ltd meets the condition at section 236(3)(c)(i). This will be the case if it is 95% owned by investment funds, UK REITs, or overseas equivalents.

B1 Ltd, B2 Ltd and B3 Ltd are investment funds. Z Ltd is neither an investment fund nor a REIT.

B1 Ltd has a 90% direct interest in A Ltd.

Z Ltd has a 10% direct interest in A Ltd.

B2 Ltd has a 60% direct interest in Z Ltd.

B3 Ltd has a 50% interest in B2 Ltd.

No other investment funds or REITs have an interest in these entities.

Step 1

B1 Ltd has a 90% direct interest in A Ltd.

Z Ltd has a 10% direct interest in A Ltd.

B2 has a 6% indirect interest in A Ltd.

B3 has a 3% indirect interest in A Ltd.

All other indirect interests are ignored as they are held by entities that are not members of the relevant class of entity.

Step 2

B3 has an indirect interest in A Ltd held through B2 Ltd. B2 Ltd is a member of the relevant class of entity. The interest of B3 is therefore ignored.

Step 3

B2 has a 6% indirect interest held through Z Ltd. We reduce the direct interest by the amount of the indirect interest (leaving Z Ltd with an interest of 4%).

B1 has a 90% direct interest in A Ltd and B2 has a 6% indirect interest in A Ltd. The percentage ownership held by the relevant class in A Ltd is therefore 96%. This exceeds 95%, so the test is met.