Income and Corporation Taxes Act 1988

1 (1) For the purposes of [F1 sections 403C and 413(7)] and this Schedule, an equity holder of a company is any person who—

(a) holds ordinary shares in the company, or

(b) is a loan creditor of the company in respect of a loan which is not a normal commercial loan,

and any reference in that section to profits or assets available for distribution to a company’s equity holders does not include a reference to any profits or assets available for distribution to any equity holder otherwise than as an equity holder.

(2) For the purposes of sub-paragraph (1)(a) above “ordinary shares” means all shares other than [F2 relevant] preference shares.

(3) In this Schedule “ [F3 relevant] preference shares” means shares which—

(a) are issued for consideration which is or includes new consideration; and

[F4 (b) do not carry any right either to conversion into shares or securities of any other description except—

(i) shares to which sub-paragraph (5A) below applies,

(ii) securities to which sub-paragraph (5B) below applies, or

(iii) shares or securities in the company’s quoted parent company,

or to the acquisition of any additional shares or securities;] and

[F5 (c) either—

(i) do not carry a right to dividends, or

(ii) carry a right to dividends to which paragraph 1A applies; and]

(d) on repayment do not carry any rights to an amount exceeding [F6 the new consideration received by the company in respect of the issue of the shares] except in so far as those rights are reasonably comparable with those general for fixed dividend shares listed [F7 on a recognised stock exchange].

(4) Subsection (7) of section 417 shall apply for the purposes of sub-paragraph (1)(b) above as it applies for the purposes of Part XI, but with the omission of the reference to subsection (9) of that section.

(5) In sub-paragraph (1)(b) above “normal commercial loan” means a loan of or including new consideration and—

[F8 (a) which does not carry any right either to conversion into shares or securities of any other description except—

(i) shares to which sub-paragraph (5A) below applies,

(ii) securities to which sub-paragraph (5B) below applies, or

(iii) shares or securities in the company’s quoted parent company,

or to the acquisition of any additional shares or securities;] and

(b) which does not entitle that loan creditor to any amount by way of interest which depends to any extent on the results of the company’s business or any part of it or on the value of any of the company’s assets or which exceeds a reasonable commercial return on the new consideration lent; and

(c) in respect of which the loan creditor is entitled, on repayment, to an amount which either does not exceed the new consideration lent or is reasonably comparable with the amount generally repayable (in respect of an equal amount of new consideration) under the terms of issue of securities listed [F7 on a recognised stock exchange].

[F9 (5A) This sub-paragraph applies to any shares which—

(a) satisfy the requirements of sub-paragraph (3)(a), (c) and (d) above, and

(b) do not carry any rights either to conversion into shares or securities of any other description, except shares or securities in the company’s quoted parent company, or to the acquisition of any additional shares or securities.

(5B) This sub-paragraph applies to any securities representing a loan of or including new consideration and—

(a) which satisfies the requirements of sub-paragraph (5)(b) and (c) above, and

(b) which does not carry any such rights as are mentioned in sub-paragraph (5A)(b) above.

(5C) For the purposes of sub-paragraphs (3) and (5) to (5B) above a company (“the parent company”) is another company’s “quoted parent company” if and only if—

(a) the other company is a 75 per cent. subsidiary of the parent company,

(b) the parent company is not a 75 per cent. subsidiary of any company, and

(c) the parent company’s ordinary shares (or, if its ordinary share capital is divided into two or more classes, its ordinary shares of each class) are [F10 listed] on a recognised stock exchange or dealt in on the Unlisted Securities Market;

and in this sub-paragraph “ordinary shares” means shares forming part of ordinary share capital.

(5D) In the application of sub-paragraphs (3) and (5) to (5B) above in determining for the purposes of sub-paragraph (5C)(a) above who are the equity holders of the other company (and, accordingly, whether section 413(7) prevents the other company from being treated as a 75 per cent. subsidiary of the parent company for the purposes of sub-paragraph (5C)(a)), it shall be assumed that the parent company is for the purposes of sub-paragraphs (3) and (5) to (5B) above the other company’s quoted parent company.]

[F11 (5E) For the purposes of sub-paragraph (5)(b) above, the amount to which the loan creditor is entitled by way of interest—

(a) shall not be treated as depending to any extent on the results of the company’s business or any part of it by reason only of the fact that the terms of the loan provide for the rate of interest to be reduced in the event of the results of the company’s business or any part of it improving [F12 , or for the rate of interest to be increased in the event of the results of the company’s business or any part of it deteriorating] , and

(b) shall not be treated as depending to any extent on the value of any of the company’s assets by reason only of the fact that the terms of the loan provide for the rate of interest to be reduced in the event of the value of any of the company’s assets increasing [F13 , or for the rate of interest to be increased in the event of the value of any of the company’s assets diminishing].

(5F) Sub-paragraph (5H) below applies where—

(a) a person makes a loan to a company on the basis mentioned in sub-paragraph (5G) below for the purpose of facilitating the acquisition of land, and

(b) none of the land which the loan is used to acquire is acquired with a view to resale at a profit.

(5G) The basis referred to above is that—

(a) the whole of the loan is to be applied in the acquisition of land by the company or in meeting the incidental costs of obtaining the loan,

(b) the payment of any amount due in connection with the loan to the person making it is to be secured on the land which the loan is to be used to acquire, and

(c) no other security is to be required for the payment of any such amount.

(5H) For the purposes of sub-paragraph (5)(b) above, the amount to which the loan creditor is entitled by way of interest shall not be treated as depending to any extent on the value of any of the company’s assets by reason only of the fact that the terms of the loan are such that the only way the loan creditor can enforce payment of an amount due is by exercising rights granted by way of security over the land which the loan is used to acquire.

(5I) In sub-paragraph (5G)(a) above the reference to the incidental costs of obtaining the loan is to any expenditure on fees, commissions, advertising, printing or other incidental matters wholly and exclusively incurred for the purpose of obtaining the loan or of providing security for it.]

(6) Notwithstanding anything in sub-paragraphs (1) to (5) above but subject to sub-paragraph (7) below, where—

(a) any person has, directly or indirectly, provided new consideration for any shares or securities in the company, and

(b) that person, or any person connected with him, uses for the purposes of his trade assets which belong to the company and in respect of which there is made to the company—

(i) [F14 an annual investment allowance or] a first-year allowance within the meaning of [F15 Part 2 of the Capital Allowances Act] in respect of expenditure incurred by the company on the provision of [F15 plant or machinery];

(ii) a writing-down allowance within the meaning of [F15 Part 2 of the Capital Allowances Act] in respect of expenditure incurred by the company on the provision of [F15 plant or machinery]; or

(iii) an allowance under section [F16 Chapter 3 of Part 6 of the Capital Allowances Act] in respect of expenditure incurred by the company on [F17 research and development (within the meaning of Part VII of that Act)];

then, for the purposes of this Schedule, that person, and no other, shall be treated as being an equity holder in respect of those shares or securities and as being beneficially entitled to any distribution of profits or assets attributable to those shares or securities.

(7) In any case where sub-paragraph (6) above applies in relation to a bank in such circumstances that—

(a) the only new consideration provided by the bank as mentioned in paragraph (a) of that sub-paragraph is provided in the normal course of its banking business by way of a normal commercial loan as defined in sub-paragraph (5) above; and

(b) the cost to the company concerned of assets falling within paragraph (b) of that sub-paragraph which are used as mentioned in that paragraph by the bank or a person connected with the bank is less than the amount of that new consideration,

references in sub-paragraph (6) above, other than the reference in paragraph (a), to shares or securities in the company shall be construed as references to so much only of the loan referred to paragraph (a) above as is equal to the cost referred to in paragraph (b) above.

(8) In this paragraph “new consideration” has the same meaning as in section 254 and any question whether one person is connected with another shall be determined in accordance with section 839 .

Textual Amendments

F1 Words in Sch. 18 paras. 1(1), 2(1), 3(1), 4(3)(4), 5A(3)(4), 5C(3)(4), 5D(3)(4), 5E(3)(4), 6 substituted (retrospectively) by Finance Act 2000 (c. 17), s. 100(4)(a)(5)

F2 Word in Sch. 18 para. 1(2) substituted (with effect in accordance with Sch. 9 para. 5 of the amending Act) by Finance Act 2009 (c. 10), Sch. 9 para. 2(2) (with Sch. 9 paras. 6-8)

F3 Word in Sch. 18 para. 1(3) substituted (with effect in accordance with Sch. 9 para. 5 of the amending Act) by Finance Act 2009 (c. 10), Sch. 9 para. 2(3)(a) (with Sch. 9 paras. 6-8)

F4 1989 s.101(2)from 27July 1989;from 14March 1989for purposes of subss. (1D)and (1E)of 1970 s.272.Previously

“(b) do not carry any right either to conversion into shares or securities of any other description or to the acquisition of any additional shares or securities;”.

F5 Sch. 18 para. 1(3)(c) substituted (with effect in accordance with Sch. 9 para. 5 of the amending Act) by Finance Act 2009 (c. 10), Sch. 9 para. 2(3)(b) (with Sch. 9 paras. 6-8)

F6 Words in Sch. 18 para. 1(3)(d) substituted (with effect in accordance with Sch. 9 para. 5 of the amending Act) by Finance Act 2009 (c. 10), Sch. 9 para. 2(3)(c) (with Sch. 9 paras. 6-8)

F7 Words in Sch. 18 para. 1(3)(d)(5)(c) substituted (with effect in accordance with Sch. 27 para. 6(3)(4) of the amending Act) by Finance Act 2000 (c. 17), Sch. 27 para. 5(2) (with Sch. 27 para. 6(1))

F8 1989 s.101(3)from 27July 1989;from 14March

for purposes of subss. (1D)and (1E)of 1970 s.272.Previously

“(a) which does not carry any right either to conversion into shares or securities of any other description or to the acquisition of additional shares or securities;”.

F9 1989 s.101(4)from 27July 1989;from 14March 1989for purposes of subss. (1D)and (1E)of 1970 s.272.

F10 Word in Sch. 18 para 1(5C)(c) substituted (with effect in accordance with Sch. 38 para. 6(10) of the amending Act) by Finance Act 1996 (c. 8), Sch. 38 para. 6(1)(2)(k)

F11 Sch. 18 para. 1(5E)-(5I) inserted (1.4.1991) by Finance Act 1991 (c. 31, SIF 63:1), s. 77(1)-(3)

F12 Words in Sch. 18 para. 1(5E)(a) inserted (with application in accordance with s. 86(2) of the amending Act) by Finance Act 2000 (c. 17), s. 86(2)(a)

F13 Words in Sch. 18 para. 1(5E)(b) inserted (with application in accordance with s. 86(2) of the amending Act) (by Finance Act 2000 (c. 17), s. 86(2)(b)

F14 Words in Sch. 18 para. 1(6)(b)(i) inserted (with effect in accordance with Sch. 24 para. 23 of the amending Act) by Finance Act 2008 (c. 9), Sch. 24 para. 18

F15 Words in Sch. 18 para. 1(6)(b)(i)(ii) substituted (with effect in accordance with s. 579(1) of the amending Act) by Capital Allowances Act 2001 (c. 2), Sch. 2 para. 63(a) (with Sch. 3)

F16 Words in Sch. 18 para. 1(6)(b)(iii) substituted (with effect in accordance with s. 579(1) of the amending Act) by Capital Allowances Act 2001 (c. 2), Sch. 2 para. 63(b) (with Sch. 3)

F17 Words in Sch. 18 para 1(6)(b)(iii) substituted (with effect in accordance with s. 68(2) of the amending Act) by Finance Act 2000 (c.17), Sch. 19 para. 6

Modifications etc. (not altering text)

C1 See 1990 s.32(12)(b).Reference to

“section 413(7) to (9)”

to be construed as a reference to 1990 s.31(4)where Sch.18applies to disposals of shares to employee share ownership trusts.

C2 Sch. 18 para. 1(5) applied (with modifications) (1.5.1995) by Finance Act 1993 (c. 34), s. 153(11A) (as inserted by Finance Act 1995 (c. 4), Sch. 24 para 4(4))

C3 See s.291(6)—para.1applied for purposes of business expansion scheme.