CTM15210 - Distributions: general: preference share lending

Distribution income received by a company is not liable to CT. Accordingly such income is more attractive to an investing company than assessable income. That company will therefore seek to receive its income as distribution income if it has a choice. A situation where this might arise is where a borrowing company has no taxable profits; it might have the same borrowing cost whether it paid loan interest as interest or in the form of a distribution, (for a distribution made before 6 April 1999, the company would have to account for ACT). If the borrower were to co-operate with the investing company in order to provide non-taxable distribution income, it would expect to benefit by way of lower finance costs.

One way in which loan interest can effectively be converted to a distribution by way of a dividend is for the loan to take the form of a subscription for fixed- or variable-rate preference share capital in the borrowing company. That company then pays a dividend rather than interest.

CTIAA (Technical) continues to monitor the use of devices of this kind. You should make a report in any case where there has been a new issue of preference shares to the value of £5m or more. This report should contain the following information:

• the Area office which deals with the issuer,
• the issuing company,
• the subscribing company,
• the date of the issue,
• the number of shares,
• their par value plus any premium paid,
• whether they are redeemable shares and, if so, the redemption terms,
• whether the issuer and the subscriber are within a group as defined, for payments prior to 11 May 2001, in ICTA88/S247 and whether the companies have given notice of an election under ICTA88/S247 (1)(a) (see CTM80085),
• whether any dividends paid in respect of the preference shares prior to 6 April 1999 would have been an FID,
• the rate of dividend,
• whether the issuer can expect to use any ACT in respect of the dividends within three years of the payment of the dividends,
• any special features of the scheme such as:

• • features which suggest that they are not straightforward preference share lending schemes or, indeed, that preference share lending is not the main purpose of the scheme,
  • the terms of any guarantee and any other special features,
  • anything else you might think relevant.