CTM81035 | Groups & consortia: groups - entitlement to profits or assets available for distribution: equity holders - subsidiary profits available to

CTA10/S165

The amount of the subsidiary’s profits which is treated as available for distribution to equity holders for a relevant accounting period (CTM81005) is:

• an amount of profits equal to the total profits which arose in that accounting period, whether or not any of those profits are distributed (CTA10/S165(3)),’Profits’ for this purpose are commercial profits, not tax profits. To arrive at the commercial profits you take the profit figure shown in the profit and loss account, and

  • add back any payments made to equity holders as such (CTM81010 equity holders as such) which have been deducted, and

  • deduct fixed rate preference dividends and commercial loan interest not charged in the profit and loss account.Example:

    Company M’s accounts for the accounting period ended 31 December 2015 show commercial profits of £1,000. The profit and loss account looks like this:

The loan interest is in respect of a loan of £40,000 made by the principal shareholder, Mrs OM. The loan carries interest at 5% and is made on terms that she can convert the loan into ordinary shares at par. This is not, therefore, a ‘normal commercial loan’ for the purpose of CTA10/S162 (CTM81010 ‘normal commercial loan’).

The 10,000 5% preference shares are owned by Mr PM, who is Mrs OM’s husband. He paid £10,000 cash for them in 2009. The shares carry rights to a fixed dividend of 5% of each year, and to repayment at £1 each in 2021. They have no other rights. These are, therefore restricted preference shares for the purpose of CTA10/S160 (CTM81010).

For the purpose of arriving at the ‘profits available for distribution to equity holders’ in CTA10/S151(4):

• the interest on the loan to Mrs OM, which is not a ‘normal commercial loan’ is added back, and

• the dividends on the restricted preference shares owned by Mr PM are deducted.The ‘profits available for distribution to equity holders’ are, therefore, £2,500. This is calculated as follows: