»Ê¹ÚÌåÓýapp

Qualifying ordinary shares

This guidance applies to periods of account beginning before 1 January 2005

In order to qualify, the ordinary shares had to

• carry a right to a dividend that was not fixed (FA96/S92(1B)), and
• be listed on a recognised stock exchange, or be shares in a trading company or a holding company (S92(1C)).

Right to a dividend

Shares did not qualify if they carried

• no right to a dividend or any other profit-sharing rights
• a right only to a fixed-rate dividend, with no other profit-sharing rights.

Example

LB Ltd issued a security for £10,000 with a face value of £10,000 to KD Ltd. »Ê¹ÚÌåÓýapp terms showed that

• at the end of 1 year, the holder could choose to exchange the security for shares in TG Ltd
• the shares would be issued on a 1 for 1 basis, that is, £1 nominal loan stock will be converted into £1 nominal of shares in TG Ltd
• the shares in TG Ltd to be offered in exchange carried the right to a fixed dividend payment each year. Any dividend payments not paid would be rolled up and paid when there were funds available.

As the shares were guaranteed to generate a set amount of income, their value had, to some extent, been predetermined and controlled. »Ê¹ÚÌåÓýapp return on the loan has likewise been predetermined. »Ê¹ÚÌåÓýapp security would not have fallen within FA96/S92.

Shares in a trading or holding company

»Ê¹ÚÌåÓýapp definitions used for ‘trading companyâ€� and ‘holding companyâ€� were those which were used for the purposes of taper relief in TCGA1992/SCHA1/PARA22(1) (itself now repealed by FA 2008). »Ê¹ÚÌåÓýappre are details at CG17952b. »Ê¹ÚÌåÓýapp main purpose of this provision is to ensure that the value of the shares cannot be artificially controlled

Example

LB Ltd issued a security for £10,000 with a face value of £10,000 to KD Ltd. »Ê¹ÚÌåÓýapp terms showed that

• at the end of 1 year, the holder could choose to convert the security into shares in TG Ltd
• the shares would be issued on a 1 for 1 basis, that is, £1 nominal loan stock will be converted into £1 nominal of shares in TG Ltd.

TG Ltd was a subsidiary of LB Ltd. It was not a trading company, and held only one asset, a security issued by TT Ltd, another subsidiary of TG Ltd. That security would redeem for £15,000.

That arrangement ensured that TG Ltd’s shares were worth £15,000. »Ê¹ÚÌåÓýapp value of the shares offered in exchange were controlled, and KD Ltd was not exposed to the fluctuations in value that would happen if TG Ltd was a trading company open to market influences.