CTM06020 - Corporation Tax: company reconstructions: tests of ownership

ICTA88/S344 (1) - (4)

For purposes of ICTA88/S343 common ownership of a trade can be established by looking at the owners of a company's ordinary share capital. Ordinary share capital in relation to a company is defined at ICTA88/S832 (1). It means all the issued share capital of the company, no matter what name(s) the issued share capital has. But it does not mean capital whose holders have only a right to a dividend at a fixed rate, but have no other right to share in the profits. The ownership of shares has to be beneficial ownership. There is guidance on this at CTM06030.

A trade that is owned successively by two companies is not owned by the same person or persons. However, Section 344 (1) to (3) looks at the owners of the ordinary share capital of each company. The interest in the trade carried on by a company is then determined by reference to the proportion of the ordinary share capital held by a person in the predecessor and successor companies.

Ownership of a trade is established when any one of the following tests is met. The tests are that the trade belongs to:

• the company which carries it on (Section 343 (1)(a)), or
• the holders of the ordinary share capital of the company carrying it on (Section 344 (2)(a)), or
• the parent of the company carrying on the trade (Section 344 (2)(b)), or
• the holders of the ordinary share capital of the parent (Section 344 (2)(b)), or
• the person or persons who by voting power, or other means, can direct or control the affairs of a company which directly or indirectly owns the ordinary share capital of the company carrying on the trade (last eight lines of Section 344 (2)).

The common ownership condition in Section 343 is met if you can establish:

• a common 75% interest under any combination of these ways,
• within the three-year time span set out at CTM06010.

Section 344 (3) sets out what is meant by 'parent' and 'subsidiary' for the purposes of these rules.

Section 344 (4) requires that you treat relatives as a single person when you determine ownership. 'Relative' for this purpose means:

• husband
• wife
• civil partner (with effect from 5 December '2005')
• ancestor
• lineal descendant
• brother, or
• sister.

It does not include relatives of relatives.

If a person is entitled to income of a trust, treat that person's shareholding as including shares held by the trust (Section 344 (1)(b)).

Ownership by a group of persons

You can establish common ownership by reference to the holding of a group of persons. When you do so there is no requirement that the interest of the members of a group of persons in the predecessor and successor companies should be in the same proportions.

Example 1

Colin owns 80%, and Brenda owns 20%, of Company D, which has a trade of plumbing. Company C takes over the plumbing trade from Company D. Colin and Brenda each own 50% of Company C, the successor company.

There is common ownership of the trade because the same set of persons owns not less than 75% of both companies.

Example 2

Company V is a predecessor company and Company E is a successor company. Each has issued share capital of 100 ordinary £1 shares. The shareholdings in both companies are set out below.

The 75% test is satisfied. Mrs Brown's 5% shareholding in the successor company is aggregated with that of her husband who together with Smith and Jones, owns 75% of both companies. So the same set of persons owns not less than 75% of both companies.