Legislation is to be introduced to ensure that companies issuing particular types of new preference shares to external investors do not inadvertently lose their ability to enter into arrangements with other group members in areas such as the surrender of losses and other group reliefs or trigger an anti-avoidance provision

The definition of a group necessitates the identification of the equity holders and ordinary share holders in order to determine whether the 75% test is met.  'Ordinary shares' are defined as any shares other than 'Fixed Rate Preference Shares' and preference shares may for then, for this purpose, be considered to be ordinary shares. The need for funding has resulted in an increase in preference share issues and it has been noted that groups of companies where some subsidiaries are funded in part by preference shares issued to external investors may fall foul of these requirements.  In consequence, they may lose the ability to enter into arrangements to claim and surrender group relief.

In detail

In order to address the concern, changes are to be made to the legislation (Schedule 18, Income and Corporation Taxes Act 1988) to ensure that companies issuing particular types of new preference share do not fall foul of this trap.  As the same rules are also used to define group relationships for other purposes, for example a chargeable gains group, or in some anti-avoidance rules, the changes will also make it more difficult to inadvertently break a group structure or to trigger an anti-avoidance provision through issuing a common commercial financing instruments to external investors.

The changes apply to all accounting periods that commenced on or after 1 January 2008, unless an election is made to retain the existing treatment of shares issued before 18 December 2008 (or shortly after where a commitment to issue the shares was entered into before that date).