IFM40215 | Eligibility criteria: ownership condition: FA22/SCH2/PARA3

PARAS 3(1)(b) and 3(3) introduce an additional concept that is not present in the group relief rules. These provisions require that the relevant interest percentages also be tested by reference to a class of profits or assets of the company where securities are in issue which give greater entitlements to that class of profits or assets than to other profits or assets.

The rule is necessary to prevent ‘side pocket’ type arrangements. For example, a company with a large total asset base might permit a non-category A investor to take equity in return for a contribution of assets, with the equity rights tracking those assets to the exclusion of the company’s other shareholders. With this provision in place, the non-category A investor would be treated as having a 100 percent entitlement to the assets it contributed and so the company would not meet the ownership condition.