Budget Comment 2009

Preferring to be part of a group?

The Chancellor today formally announced changes to the definition of fixed-rate preference shares applicable in some areas of tax. These changes were announced in a ministerial statement in December 2008 as a result of the current turbulence in the financial markets and following the Government's investments in the banking sector.

Draft legislation has been issued and will apply for accounting periods beginning on or after 1 January 2008, although if shares were issued prior to 18 December 2008, it is possible to elect for the change to not apply to those shares.

The legislation makes changes to the treatment of companies that have issued certain preference shares (the newly defined ‘relevant preference shares’), which includes shares that can give variable returns, rather than just ‘fixed-rate’ preference shares. A relevant preference share would include, for example, preference shares which have a dividend linked to a market rate or upon which the payment of dividends is restricted by regulatory issues.

The changes are intended to ensure that such companies do not lose the ability to enter into arrangements to claim and surrender corporation tax group relief with other members of their group. However, the changed definition affects more than just group relief. The definition of groups for chargeable gains, real estate investment trusts, venture capital relief, leasing rules, Stamp Duty Land Tax group relief and transfers between associated companies for Stamp Duty are also impacted. It should be noted that this change does not affect the definition for controlled foreign company purposes.

It is important that groups of companies with preference shares in issue consider the impact of the changes on their group structure. Elections that are made in relation to shares issued prior to 18 December 2008 are irrevocable and therefore care should be taken prior to an election being made.