(1)This Chapter contains rules for Part 5 to apply in some cases as if at some times in the accounting period of a company (“A”) which holds certain kinds of shares in another company (“B”) the shares were rights under a creditor relationship of A.
(2)See, in particular—
(a)section 523 (application of Part 5 to some shares as rights under creditor relationship), and
(b)sections 524 and 526 (which describe the two kinds of shares to which the rules apply: shares subject to outstanding third party obligations and non-qualifying shares).
(3)In this Chapter references to the investing company are to A and references to the issuing company are to B.
(4)For the purposes of this Chapter a company is treated as continuing to hold a share even though the share has been transferred to another person—
(a)under a repo or stock lending arrangement, or
(b)under a transaction which is treated as not involving any disposal as a result of section 26 of TCGA 1992 (mortgages and charges not to be treated as disposals).
(5)But subsection (4) does not apply for the purposes of section 535 (shares ceasing to be shares to which section 523 applies).
(6)For the purposes of this Chapter, the definition of “share” in section 476(1) only applies so far as it provides that “share” does not include a share in a building society.
(7)See section 116B of TCGA 1992 for the effect for the purposes of that Act of shares beginning or ceasing to be shares to which section 523 applies.
(1)This section applies in relation to the times in a company’s accounting period when—
(a)the company holds a share in another company, and
(b)either—
(i)section 524 (shares subject to outstanding third party obligations) applies to the share, or
(ii)that section does not so apply, but section 526 (non-qualifying shares) does.
(2)Part 5 applies as if at those times—
(a)the share were rights under a creditor relationship of the investing company, and
(b)any distribution in respect of the share were not a distribution (and accordingly were within Part 5).
(3)But no debits are to be brought into account by the investing company for the purposes of Part 5 as respects the share, except where—
(a)this section applies because of subsection (1)(b)(ii), and
(b)the associated transactions condition is met (see section 532).
(4)In this Chapter references to “the share” are to the share mentioned in subsection (1).
(5)For special rules about the amounts to be brought into account where this section applies, see section 534.
(1)This section applies to the share held by the investing company if it—
(a)is subject to outstanding third party obligations (see subsection (2)), and
(b)is an interest-like investment (see section 525).
(2)For the purposes of this Chapter a share is subject to outstanding third party obligations if—
(a)the share is subject to obligations of a kind specified in subsection (4) or will or might be so subject under any relevant arrangements (see subsection (5)),
(b)the obligations are—
(i)obligations of a person other than the investing company, or
(ii)obligations of the investing company which, under any relevant arrangements, will or might be discharged directly or indirectly by any other person, and
(c)the obligations are yet to be discharged.
(3)Accordingly, those obligations are the “third party obligations” in the case of that share.
(4)The kinds of obligation are—
(a)an obligation to meet unpaid calls on the share, and
(b)any other obligation to make a contribution to the capital of the issuing company that could affect the value of the share.
(5)For the purposes of subsection (2)—
(a)“arrangements” includes any agreement or understanding, whether or not it is legally enforceable, and
(b)“arrangements” are “relevant” if they were entered into before or at the time when the share was issued.
(1)In section 524 “interest-like investment” means a share whose nature is such that its fair value—
(a)is likely to increase at a rate which represents a return on an investment of money at a commercial rate of interest, and
(b)is unlikely to deviate to a substantial extent from that rate of increase.
(2)Fluctuations in value resulting from changes in exchange rates are ignored for the purposes of subsection (1).
(3)For the purposes of subsection (1), the fair value of a share which is subject to outstanding third party obligations (see section 524(2)) must include the fair value of the obligations.
(4)For the purposes of subsection (1), it is assumed—
(a)that any third party obligations will be fully met at the time at which they are due, and
(b)that no transaction (or series of transactions) intended to prevent the condition in subsection (1)(a) or (b) from being met will be or has been entered into.
(1)This section applies to the share held by the investing company if—
(a)it is a non-qualifying share (see subsection (2)),
(b)it does not fall to be treated for the accounting period in question as if it were rights under a creditor relationship of the company because of section 490 (holdings in OEICs, unit trusts and offshore funds treated as creditor relationship rights), and
(c)section 130 (traders receiving distributions etc) does not apply in relation to distributions in respect of the share.
(2)A share is a non-qualifying share for the purposes of this section if one or more of the following conditions is met—
(a)the increasing value condition,
(b)the redemption return condition, and
(c)the associated transactions condition.
(3)In this Chapter—
“the increasing value condition” has the meaning given in section 527,
“the redemption return condition” has the meaning given in section 529, and
“the associated transactions condition” has the meaning given in section 532.
(1)The increasing value condition is that the assets of the issuing company are of such a nature that the fair value of the share—
(a)is likely to increase at a rate which represents a return on an investment of money at a commercial rate of interest, and
(b)is unlikely to deviate to a substantial extent from that rate of increase.
(2)Fluctuations in value resulting from changes in exchange rates are ignored for the purposes of subsection (1).
(3)The increasing value condition is not met if—
(a)the whole of the assets of the issuing company are income-producing (see subsection (4)), or
(b)substantially the whole of them are income-producing on the basis of a calculation of their fair value.
(4)The assets which are “income-producing” for the purposes of this section are—
(a)any share to which section 524 applies,
(b)any share as respects which the increasing value condition is met or would be met apart from subsection (3),
(c)any share as respects which the condition in section 529(1)(b) is met,
(d)any share as respects which the associated transactions condition is met,
(e)any asset of a description specified in any paragraph of section 494(1) (meaning of “qualifying investments”),
(f)rights under a creditor repo within the meaning of section 543,
(g)any share in a company—
(i)the whole of whose assets are assets within paragraphs (a) to (f), or
(ii)substantially the whole of whose assets are such assets on the basis of a calculation of their fair value.
(5)For the purposes of subsection (1), it is assumed that no transaction (or series of transactions) intended to prevent either of the conditions in subsection (1) from being met will be or has been entered into.
(1)The Treasury may by regulations amend section 527 for the purpose of adding to the assets which are income-producing for the purposes of that section.
(2)The regulations may provide that they have effect in relation to accounting periods ending on or after the day on which the regulations come into force.
(1)The redemption return condition is that the share—
(a)is redeemable (see subsection (2)),
(b)is designed to produce a return which equates, in substance, to the return on an investment of money at a commercial rate of interest, and
(c)is not an excepted share (see section 530).
(2)For the purposes of this section, a share is regarded as redeemable only if it meets condition A, B or C.
(3)Condition A is that it is redeemable as a result of its terms of issue (or any collateral arrangements)—
(a)requiring redemption,
(b)entitling the holder to require redemption, or
(c)entitling the issuing company to redeem.
(4)Condition B is that there are arrangements which will or might entitle the investing company to qualifying redemption amounts.
(5)In subsection (4) “qualifying redemption amounts” means amounts which, when taken together, are the same, or substantially the same, as an amount which might be payable on the redemption of the share.
(6)Condition C is that it is reasonable to assume that the investing company will or might become entitled to qualifying redemption amounts.
(7)For the purposes of this section—
(a)“arrangements” includes any agreement or understanding, and
(b)it does not matter whether or not the agreement or understanding—
(i)is legally enforceable, or
(ii)forms part of the share’s terms of issue.
(1)A share is an “excepted share” for the purposes of section 529 if—
(a)it is a qualifying publicly issued share (see subsections (2) and (3)),
(b)it is a share which mirrors a public issue (see subsections (4) and (5)), or
(c)the investing company’s purpose in acquiring the share is not an unallowable purpose (see section 531).
(2)A share is a “qualifying publicly issued share” for the purposes of this section if—
(a)it was issued by a company as part of an issue of shares to persons not connected with the company, and
(b)less than 10% of the shares in that issue are held by the investing company or persons connected with it.
(3)But a share is not a qualifying publicly issued share for those purposes if the investing company’s purpose in acquiring the share is an unallowable purpose because of section 531(1)(a).
(4)The first case where shares (“the mirroring shares”) mirror a public issue is where—
(a)a company (“company A”) issues shares (“the public issue”) to persons not connected with the company,
(b)within 7 days of that issue, one or more other companies (“companies BB”) issue the mirroring shares to company A on the same terms as the public issue or substantially the same terms,
(c)company A and companies BB are associated companies (see subsection (6)), and
(d)the total nominal value of the mirroring shares does not exceed the nominal value of the public issue.
(5)The second case where shares (“the second-level mirroring shares”) mirror a public issue is where, in the circumstances of the first case—
(a)within 7 days of the public issue, one or more other companies (companies CC) issue the second-level mirroring shares to one or more of companies BB on the same terms as the public issue or substantially the same terms,
(b)company A, companies BB and companies CC are associated companies, and
(c)the total nominal value of the second-level mirroring shares does not exceed the nominal value of the public issue.
(6)For the purposes of this section companies are associated companies if they are members of the same group of companies for the purposes of Chapter 4 of Part 10 of ICTA (group relief) (see section 413(3)(a) of that Act).
(1)For the purposes of section 530, a share is acquired by the investing company for an unallowable purpose if—
(a)the purpose for which the company holds the share or one of the main purposes is to circumvent section 130 (traders receiving distributions etc), or
(b)the purpose for which it does so or one of the main purposes is any other purpose which is a tax avoidance purpose (see subsection (4)).
(2)The condition in subsection (1)(a) is taken to be met, in particular, if the investing company was an associated company of a bank at the time when the investing company acquired the share.
(3)But subsection (2) does not apply if the investing company shows that—
(a)immediately before that time, some or all of its business consisted of making and holding investments, and
(b)it acquired the share in the ordinary course of that business.
(4)In this section—
“bank” has the meaning given by section 840A of ICTA, and
“tax avoidance purpose”, in relation to a company, means any purpose which consists of securing a tax advantage (whether for the company or another person).
(5)Section 530(6) (when companies are associated) applies for the purposes of this section as it applies for the purposes of section 530.
(1)The associated transactions condition is that there is a scheme or arrangement (whether or not the investing company is a party to it) under which the share and one or more associated transactions are together designed to produce a return for any one or more persons which equates, in substance, to the return on an investment of money at a commercial rate of interest.
(2)But the associated transactions condition is not met if—
(a)the increasing value condition is met as respects the share or would be apart from section 527(3) (exception for income-producing assets), or
(b)the redemption return condition is met as respects the share or would be apart from section 529(1)(c) (excepted shares).
(3)In this section “associated transaction” includes—
(a)entering into or acquiring rights or liabilities under any of the kinds of contract specified in subsection (4), and
(b)acquiring rights or receiving benefits in respect of other shares.
(4)The contracts referred to in subsection (3) are—
(a)a derivative contract,
(b)a contract which would be a derivative contract, apart from section 591(3),
(c)a contract having a similar effect to a contract within paragraph (a) or (b), or
(d)a contract of insurance or indemnity.
(1)The Treasury may by regulations amend this Chapter so as to add, vary or remove conditions to be met for the purposes of section 526(2) (non-qualifying shares).
(2)If the Treasury add, vary or remove such a condition, they may also by regulations amend any of the enactments specified in subsection (3) so as to make provision for or in connection with taxation in the case of any asset or transaction which is or was mentioned in the condition.
(3)The enactments are—
(a)Part 5,
(b)this Part,
(c)Part 7 (derivative contracts),
(d)Chapters 1 to 3 of Part 6 of ICTA (company distributions), and
(e)Part 18 of ICTA (double taxation relief).
(4)Regulations under this section may make—
(a)different provision for different cases, and
(b)incidental, supplemental, consequential and transitional provision and savings.
(5)Regulations made under subsection (4)(b) may, in particular, include provision amending any enactment or any instrument made under an enactment.
(1)If section 523 (application of Part 5 to certain shares as rights under creditor relationship) applies, the credits to be brought into account by the investing company for the purposes of Part 5 as respects the share are to be determined on the basis of fair value accounting.
(2)Subsection (1) is subject to subsections (4) and (5).
(3)Section 525(3) applies for the purposes of subsection (1) as it applies for the purposes of section 525(1).
(4)In the case of shares to which section 524 applies (shares subject to outstanding third party obligations), in determining the credits to be brought into account there must be left out of account any amounts in respect of any transaction (or series of transactions) which—
(a)would have the effect of preventing either of the conditions in section 525(1) (conditions for share to be an interest-like investment) from being met, or
(b)would do so if the assumption in section 525(4)(b) were ignored.
(5)In the case of shares to which section 526 applies (non-qualifying shares) where the increasing value condition is met (see section 527), in determining the credits to be brought into account there must be left out of account any amounts in respect of any transaction (or series of transactions) which—
(a)would have the effect of preventing that condition from being met, or
(b)would do so if the assumption in section 527(5) were ignored.
(6)Subsection (7) applies if section 523 applies in the case of shares to which section 526 applies where the associated transactions condition is met (see section 532).
(7)The debits to be brought into account by the investing company for the purposes of Part 5 as respects the share must not exceed the amount of the credits brought into account in respect of the associated transactions under Part 7 (derivative contracts), as a result of section 588, in accordance with section 603 (non-qualifying shares where the associated transactions condition is met).
(8)Subsection (1) applies instead of section 349 (application of amortised cost basis to connected companies relationships) if that section would otherwise apply.
(1)This section applies if at any time section 523 (application of Part 5 to certain shares as rights under creditor relationship) ceases to apply in the case of a share held by the investing company.
(2)The company is treated for the purposes of Part 5—
(a)as having disposed of the share immediately before that time for consideration of an amount equal to its fair value at that time, and
(b)as having immediately reacquired it for consideration of the same amount.