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Finance Act 2012

Section 32: Group Relief: Meaning of “Normal Commercial Loan”

Summary

1.Section 32 extends the definition of “normal commercial loan” to include loans that carry a right to conversion into shares or securities in quoted companies that are not connected to the company that issues the loan. This means that the holders of such loans are not considered to hold equity in the issuing company, and so ensures that the group status of the company will not be affected if it issues this type of loan.

Details of the Section

2.Subsection (1) provides that these changes will be made to the Corporation Tax Act (CTA) 2010.

3.Subsection (2) amends section 162(2)(c) of CTA 2010. Section 162(2) contains condition A which must be met in order for the loan to be a normal commercial loan. The amendment provides that condition A is satisfied if the loan carries a right to conversion into shares or securities in a quoted unconnected company (this is defined in subsection (4) of this section).

4.Subsection (3) amends of section 164(2)(c) so that condition A in section 162(2) is also satisfied where the loan carries a right to conversion into securities that themselves carry a right to conversion into shares or securities in a quoted unconnected company.

5.Subsection (4) inserts a new subsection into section 162(2).  New section 162(2A) provides that for the purposes of sections 162 and 164 a company is a quoted unconnected company where it is not connected to the company in which the relevant loan is held and its ordinary shares are listed on a recognised stock exchange.

Background Note

6.Members of a group or consortium are determined by reference not only to ordinary share capital held, but also to beneficial entitlement to profits available for distribution to equity holders and assets available for distribution to equity holders in a winding up.

7.For these purposes, an equity holder includes ordinary shareholders and loan creditors in relation to loans other than normal commercial loans.

8.Prior to these amendments, loans that carried a right to conversion into the shares or securities of a wholly unconnected listed company would not have fallen within the definition of normal commercial loans; holders of such loans would be treated as equity holders. The amendments will ensure that such loans will be within the definition of normal commercial loans and the holders of the loans will not be treated as equity holders.

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