Chapter 7: Shares with guaranteed returns etc
Overview
1418.The rules in this Chapter counter avoidance through the use of shares which function in a similar way to loan relationships but which fall outside the definition. The schemes making use of these shares exploit the fact that increases in value and gains from the disposal of shares are subject only to the rules for corporation tax on chargeable gains, if at all. The schemes use derivatives in conjunction with shares, or deferred subscription agreements to create what is in form a share but in economic substance a deposit or loan. In most of them the risks associated with equity investments, as well as the rewards, are removed or significantly reduced, leaving the share giving a return, either by the payment of “dividends” or by a wholly predictable increase in value, which is the type of return expected from debt.
Section 522: Introduction to Chapter
1419.This section sets out what the Chapter does, how it is arranged and some useful cross-references. It is based on sections 91A(1), (10) and (11), 91B(1), (7) and (8), 91C(7), 91D(13) and 91E(4) of FA 1996.
1420.Subsection (6) provides that the full definition of “share” in section 476 does not apply for the purposes of this Chapter. The part of the definition that does apply to this Chapter is that the meaning of “share” does not include a share in a building society.
Section 523: Application of Part 5 to certain shares as rights under creditor relationship
1421.This section treats rights in shares as loan relationships and distributions from such shares as debits or credits under this Part where either section 524 or 526 applies. It is based on sections 91A(1), (2) and (2A) and 91B(1), (2), (2A) and (6A) of FA 1996.
Section 524: Shares subject to outstanding third party obligations
1422.This section deals with the first type of shares to fall within section 523: shares which increase in value in a similar way to an investment return as a result of an obligation by a third party. It is based on section 91A(1) and (5) to (6) of FA 1996.
Section 525: Meaning of “interest-like investment”
1423.This section explains a term used in the previous section. It is based on section 91A(7) to (9) of FA 1996.
Section 526: Non-qualifying shares
1424.This section deals with the second type of shares to fall within section 523: shares (“non-qualifying shares”) which produce predictable gains because of the nature of the assets underlying them. It is based on section 91B(1) and (6) of FA 1996. One of three conditions, dealt with in sections 527 and 529 to 532, must be met for shares to fall within this category.
Section 527: The increasing value condition
1425.This section gives the first of the conditions necessary for a share to be a non-qualifying share within section 526. It is based on section 91C(1) to (3) and (6) of FA 1996. This is where the assets of the company in which the shares are held increase at a rate similar to commercial interest but which are not income-producing.
Section 528: Regulations about income-producing assets
1426.This section gives powers to the Treasury to add to the list of income-producing assets in section 527. It is based on section 91C(4) and (5) of FA 1996.
Section 529: The redemption return condition
1427.This section gives the second of the conditions necessary for a share to be a non-qualifying share within section 526. It is based on section 91D(1) to (2A) of FA 1996. This is where a redeemable share (with certain exceptions) produces a return similar to commercial interest.
Section 530: The redemption return condition: excepted shares
1428.This section explains which redeemable shares are excluded from being shares which may meet the condition dealt with by section 529. It is based on section 91D(3) to (8) and (11) of FA 1996.
1429.“Independent person” in section 91D has been rewritten in this section as “persons not connected with the company” which is the definition in section 91D(11). Given that the definition in section 839 of ICTA applies, “persons” here refers to both companies and individuals. Section 839 is not separately referred to in this Part as the definition of “connected persons” in section 1316 applies for the purposes of the Act. The use of “independent person” appears twice in Chapter 2 of Part 4 of FA 1996 with two quite different definitions. The other definition is in section 103 of FA 1996. The use of both terms has been replaced by their definitions.
Section 531: The redemption return condition: unallowable purposes
1430.This section explains what is meant by an unallowable purpose to ascertain whether a share is a qualifying publicly issued share for the purposes of section 530 and thus excluded from the redemption return condition as an excepted share. It is based on section 91D(9) to (11) of FA 1996.
Section 532: The associated transactions condition
1431.This section gives the third and final condition necessary for a share to be a non-qualifying share within section 526. It is based on section 91E(1) to (3) of FA 1996. This is where neither of the other conditions is met but there is a scheme or arrangement under which the combined effect of the shares and another transaction produce a return similar to a commercial rate of interest.
Section 533: Power to change conditions for non-qualifying shares
1432.This section gives the Treasury the power to vary the conditions to be met under which shares may be “non-qualifying shares” for the purposes of section 526. It is based on section 91F of FA 1996.
Section 534: Amounts to be brought into account where section 523 applies
1433.This section sets out rules concerning the amounts to be brought into account for the purposes of this Part by the company holding the shares. It is based on section 91A(3), (4) and (9) and section 91B(3), (4) and (6A) of FA 1996.
1434.Subsection (7) overrides the requirement for amortised cost basis where both this section and section 349 apply. See Change 57 in Annex 1.
Section 535: Shares ceasing to be shares to which section 523 applies
1435.This section treats shares which cease to fall within section 523 as having been disposed of and reacquired. It is based on section 91G(2) of FA 1996.
