CFM6338 - Taxing Loan relationships: anti-avoidance: shares as debt: meaning of interest like investment

Interest-like investment

FA96/S91A (7) & (8) define what “interest-like investment” means in relation to a share.

Commercial rate of interest

It means a share whose nature is such that its fair value:

• is likely to increase at a rate which represents a return on an investment of money at a commercial rate of interest (see CFM6384-6), and
• is unlikely to deviate to a substantial extent from that rate of increase.

In determining whether the rate has deviated to a substantial extent, fluctuations arising from changes in exchange rates are to be left out of account.

For all times on or after 12 March 2008 fluctuations arising from changes in exchange rates are also to be left out of account when considering whether the fair value of the share is likely to increase at a rate which represents a commercial rate of interest.

Assumptions

For the purposes of determining whether the fair value of the share is likely to increase at a commercial rate of interest, it is to be assumed that:

• any third party obligations will be met in the amounts, and at the time, at which they are due, and
• for all times before 12 March 2008, that no transaction (or series of transactions) intended to prevent the share being an interest-like investment will be entered into, or,
• for all times on or after 12 March 2008, that no transaction (or series of transactions) intended to prevent the share being an interest-like investments will be, or has been, entered into. Where the falsifying transaction was entered into before 12 March 2008, it may still be taken into account in determining whether on 12 March 2008 the share becomes one to which S91A applies.

The second and third assumptions above are designed to prevent companies earning an interest-like return on a share using outstanding third party obligations, but either:

• extracting some of that return in an artificial way which results in the share itself not increasing in value at a commercial rate of interest or substantially deviating from that rate, or
• inserting some artificial contingency into the arrangements which if it was met would mean the share would not give an interest-like return.

Note there has to be a transaction and an intention for the transaction to achieve that effect, which pre-supposes that the share would otherwise meet the conditions of S91A. If absent such a transaction a share would not give an interest-like return, S91A(8)(b) cannot bring the share within the section.

But where such a transaction is entered into, no debit resulting from it is to be brought into account – see S91A(4) and CFM6334.