Revenue Note for Guidance

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Revenue Note for Guidance

413 Profits or assets available for distribution


This section and the 6 following sections provide for the definition of and interpretation of the terms used in section 412. The purpose of this group of sections is to identify the real and ultimate equity interest in the company and it requires that, to qualify for group relief, the parent company must have the required percentage of these ultimate equity interests.


“Fixed-rate preference shares”

(1) & (2) “fixed-rate preference shares” are shares which —

  • are issued for “new consideration” (within the meaning of section 135),
  • do not carry any conversion right or right to acquisition of additional shares,
  • carry rights only to fixed dividends which must not exceed a reasonable commercial return, and
  • on repayment carry rights to no more than the original new consideration or an amount reasonably comparable with what would be normal on a Stock Exchange for quoted fixed-dividend shares.

“Equity holder”

(3)(a) A “normal commercial loan” is a loan of new consideration or including new consideration (new consideration has the same meaning as in section 135). Excluded are loans which —

  • carry conversion rights in respect of shares or securities,
  • carry entitlement to interest the amount of which depends on the company’s profits or asset value and which exceeds a reasonable commercial return on the new consideration, or
  • entitle the loan creditor on repayment of the loan to an amount exceeding the new consideration which was given and which when compared with the Stock Exchange returns on similar issues is excessive.

(3)(b) An “equity holder” includes, as well as a holder of ordinary shares (being all shares other than fixed-rate preference shares), a loan creditor in respect of a non-commercial loan. The reference in section 412 to profits or assets available for distribution to an equity holder does not include profits or assets available for distribution to the equity holder otherwise than by reason of the equity holder’s shareholding or loan.

If the holder of ordinary shares acquires a bonus issue of fully paid up fixed-rate preference shares (without any new consideration – within the meaning of section 135), these latter shares, are not to be regarded as fixed-rate preference shares. They, therefore, rank as “ordinary shares” for the purposes of the definition of “equity holder”.

If this shareholder then sells the real ordinary shares, the shareholder will still be an “equity holder”. This does no harm, however, since the qualifications for group relief imposed by section 412 are additional to those in section 9, which require that the parent holds 75 per cent (or 90 per cent) of the ordinary share capital; and section 413 does not affect section 9.

(5) & (6) Included as an equity holder is any person who uses for the purposes of that person’s trade assets which are owned by the company and who has directly or indirectly provided the funds for the purchase by the company of those assets. This provision is not to apply in the case of a bank which makes a loan in the ordinary course of its banking business.

The term “equity holder” is also used in the following sections, namely, sections 413(5), 414(1), 415(1), (3) & (4)(b), 416(1), (2) & (4), 417(1), (2) & (3) and 418. All of these sections, however, merely provide additional rules for the purposes of section 412.

Loan creditor

(4) For the purpose of the definition of “equity holder”, the definition of “loan creditor” contained in section 433(6) (other than paragraph (b) of that subsection) is applied. Loan creditor includes any person holding redeemable loan capital issued by the company and any person to whom the company is indebted for money borrowed or capital assets acquired by it, and also any person entitled to a debt from the company in return for a right to receive income and any person who has received or will receive substantially more from the company than the value of the consideration the person has given it. Paragraph (b) of section 433(6), which excludes a bank in respect of money lent in the ordinary course of its banking business, is not applied, since a loan creditor will be an equity holder only if the loan is not a normal commercial loan.

Relevant Date: Finance Act 2017