INTM550620 - Hybrids: definition of key terms: 50% investment and 25% investment

The investment condition is relevant to both the control and related persons definitions, as required by the appropriate chapter. The same test is used to determine whether the investment condition is met, simply replacing X% with 25% or 50%, as appropriate. Defined at 259ND.

A person (P) has an X% investment in a company (C) if it is reasonable to suppose that

  • P possesses or is entitled to acquire X% or more of the share capital or issued share capital of C
  • P possesses or is entitled to acquire X% or more of the voting power in C, or
  • if the whole of C’s share capital were disposed of, P would receive (directly or indirectly and whether at the time of disposal or later) X% or more of the proceeds of the disposal

Similarly, a person (P) has an X% investment in another person (Q) if it is reasonable to suppose that P would receive, directly or indirectly and whether at the time or later, X% or more of

  • the distributed amount if the whole of Q’s income were distributed, or
  • Q’s assets which would be available for distribution in the event of a winding-up of Q or in any other circumstances.

References to a person receiving any proceeds, amount or assets also include references to the proceeds, amount or assets being applied, directly or indirectly, for that person’s benefit.

Profits available for distribution

Profits available for distribution in this context takes its general meaning from company law. The question is how the income of a company would be lawfully distributed by way of a dividend (or otherwise) under the relevant Companies Act(s) and with regard to the relevant facts and circumstances, for example the rights to distribution attached to the share classes set out in a company’s Articles of Association. For a winding up, this refers to assets which could lawfully be distributed by a liquidator to holders of equity in the company in a winding-up once obligations to creditors had been satisfied.

In practice, this means that if a payment is not a distribution for the purposes of the Companies Act, it is irrelevant if it might constitute a distribution for tax purposes. It is also means that ‘assets available for distribution in the event of a winding-up’ does not encompass the entitlement of a creditor in their capacity as a creditor in the course of a winding-up. In a liquidation, these amounts are discharged by the liquidator in settlement of the company’s liabilities, rather than as a distribution of the company’s remaining assets among members.

Acting together

The percentage investment a person (P) has in another person (U) may be increased where P and a third person (T) are acting together.

The applicable tests will depend on whether P has a relevant investment in U.

Whether or not P has a relevant investment in U, P will be treated as having all of T’s interest in U where

  • P and T are subject to a partnership agreement which is designed to affect the value of T’s interest in U or relates to how T exercises their rights in U, or
  • The same person manages some or all of P’s interest in U and some or all of T’s interest in U

Where P does have a relevant interest in U, there are a number of additional tests

  • P and T are connected (in the sense of s163 TIOPA 2010 – broadly spouses, relatives and trustee-settlor relationships), or
  • P can secure that T acts in accordance with P’s wishes in respect of U’s affairs, or vice versa, or
  • T can reasonably be expected to act in accordance with P’s wishes in respect of U’s affairs, or vice versa, or
  • P and T are party to an arrangement that it is reasonable to suppose will affect the value of T’s rights or interests in relation to U, or
  • P and T are party to an arrangement that relates to exercise of T’s rights in U

Relevant investment is defined in the same way as 50% investment and 25% investment above, with X% replaced with 5% and without the requirement to consider the interest of anyone who is acting together with P. When considering whether P has a 5% investment in U, you should aggregate the rights and interests of anyone connected with P under the definition at s1122 CTA 2010 (ignoring the limbs of s1122 which treat parties as connected if they are acting together or are partners in a partnership).

Rules

It is a matter of fact as to whether the conditions above are satisfied and so whether P and T are acting together. Take for example, a company (U) which has more than one loan, and the lenders (P and T) are unrelated, but each hold a shareholding in U as an investment. Each lender is likely to act in a way that protects its investment, which might also have the incidental effect of protecting the investment of the other lender. On its own, an alignment of separate interests of this sort will not generally be sufficient to show that P and T are acting together, whereas concerted action taken by P and T would be.

P and T are not treated as acting together in relation to U where the person managing their rights in U

  • is the operator of a collective investment scheme in relation to P’s rights,
  • is the operator of a different collective investment scheme in relation to T’s rights, and
  • the Commissioners are satisfied that the management of those schemes is not coordinated to influence U’s affairs

Any cases to be considered by the Commissioners should be sent to the Base Protection Policy team, BAI

By email to: hybrids.mailbox@hmrc.gov.uk

or

By post to

HM Revenue & Customs
Base Protection Policy Team
Business Assets & International
S0862
Floor 4 Rear
Central Mail Unit
Newcastle
NE98 1ZZ