IFM40266 - Eligibility criteria: election to treat listed securities as unlisted

FA22/SCH2/PARA13(3)

An election can be made under PARA13(3) which deems the investment strategy condition to be satisfied by a company which directly acquires listed or traded equity securities or other interests deriving their value from them, outside of the exceptions detailed above. The election treats all ‘relevant equity securities’ as if they were not listed or traded securities. PARA13(4) defines which securities constitute ‘relevant equity securities’.

Any election must be notified to HMRC and only has effect while the company is a QAHC. The only way an election can be revoked is where the company ceases to be a QAHC.

Where an election has effect, the distribution exemption at CTA09/S931 (INTM650000+) will not apply to distributions received by the electing company from any relevant equity securities. This includes relevant equity securities held as part of a stake-building exercise prior to a public takeover bid or those held on exit of an investment by way of initial public offering.

There are various rules at PARA 13(7) – (9) to prevent a QAHC from making an election and then attempting to receive distributions from relevant equity securities in a way in which the dividend exemption could still apply.

Example

A Ltd’s sole investment is in a wholly-owned, unlisted subsidiary, C Ltd. C Ltd invests in equity securities in X Plc and Y Plc. Those securities in X Plc and Y Plc are listed on a recognised stock exchange and constitute relevant equity securities of C Ltd (but not of A Ltd). C Ltd makes an election under PARA13(3) to treat the securities as if they were not listed. C Ltd later receives a dividend of £750,000 from Y Plc which is then paid up to A Ltd as a dividend.

The holding of relevant equity securities by C Ltd will not prevent C Ltd or A Ltd from satisfying the investment strategy condition because of the PARA13(3) election made by C Ltd.

C Ltd will be taxed on the £750,000 dividend it receives from Y Plc because the distribution exemption at CTA09/S931 will not apply. A Ltd will not be taxed on the dividend it receives from C Ltd because the distribution exemption will apply.