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CFM96000 | Interest restriction: Group-interest: ANGIE: preference shares

From HM Revenue & Customs · Corporate Finance Manual

TIOPA10/S411(1)(d), S411(2)(c), S413(4)(e)

Preference shares can be structured so as to be very similar to a loan. In many cases the preference shares will be accounted for as a financial asset and financial liability in the holder and issuer respectively. These instruments attract a particular accounting treatment given that these amounts are economically equivalent to loans, but legally in the form of shares.

Issuer: Preference shares accounted for as a financial liability

The amounts recognised in the group’s financial statements in respect of dividends payable in respect of preference shares accounted for as a financial asset is dealt with as follows:

  • They are included in the calculation of net group-interest expense, and as such are removed from the group’s profit before tax for the period in calculating group-EBITDA.

  • There is an adjustment made in the calculation of adjusted net-group interest expense, and they are therefore removed from this amount.

  • As a result they are also not included in the amount of qualifying net group-interest expense.

As a result, the accrual of dividends due under such preference shares will have no impact on the group’s adjusted net-group expense, qualifying net group-interest expense or group-EBITDA for the period.

Holder: Preference shares accounted for as a financial asset

The amounts recognised in the group’s financial statements in respect of dividends receivable from preference shares accounted for as a financial asset is dealt with as follows:

  • They are included in the calculation of net group-interest expense, and as such are removed from the group’s profit before tax for the period in calculating group-EBITDA.

  • There is no adjustment made in the calculation of adjusted net-group interest expense, and they are therefore included in this amount for the period.

  • Likewise they are included in the amount of qualifying net group-interest expense for the period.

As a result, income arising from such preference shares will reduce the group’s adjusted net-group expense and qualifying net group-interest expense for the period. It does not impact on the group-EBITDA for the period.