IFM40210 - Eligibility criteria: ownership condition: introduction

FA22/SCH2/PARAS 3 to 7 and PARA 59

The principle underlying the ownership condition is that no more than 30 percent of a QAHC must be held by non-category A investors. Category A investors are defined in FA22/SCH2/PARAS 8 to 11 Guidance on those provisions is set out at IFM40240+.

The ownership condition is contained within PARA 3, with additional interpretative provisions within PARAS 4 to 7. It operates by reference to ‘relevant interests’ and is closely modelled on the rules used to determine the extent of holdings in companies for the purposes of group and consortium relief. Accordingly, it looks to test voting rights, entitlement to profit distributions and entitlement to assets on a winding up. As in the group relief rules, the economic tests are applied to holders of equity and debt with equity-like features. Unlike the group relief rules, the ownership condition does not take account of the nominal value of share capital. The economic tests look only to entitlement to profits and assets which would be within the ring fence business (see IFM40350) were the company in question to become a QAHC.

Since the ownership condition disqualifies by reference to the interests of non-category A investors, it effectively requires that each non-category A holder of relevant interests must have their percentage interest determined under each of the different criteria. Then, following the principle of the group relief rules, the worst case (in this case, the highest percentage delivered by any of the tests) is taken as the relevant interest of the person in question. Where different criteria deliver different percentage outcomes, it will be mathematically inevitable that the total of the relevant interests of all holders of relevant interests exceeds 100 percent. This is not relevant to the calculation, which simply looks to the total relevant interests of non-category A holders and asks if that exceeds 30 percent.

PARA 59 provides for qualifying alternative finance arrangements which are equivalent to equity. Where such arrangements result in a person having a beneficial entitlement to a company’s profits, that person is treated as an equity holder in the company. The entitlement to profits is treated as an entitlement to a proportion of the profits available for distribution to equity holders.

‘Qualifying alternative finance arrangements’ takes its meaning from CTA09/PT6/CH6. This means that one of the parties to the alternative finance arrangement must generally be a ‘financial institution’. See CFM44000+ for further details.