Types of distribution—interest recharacterised as a distribution: special securities
Types of distribution—interest recharacterised as a distribution: special securities

The following Tax guidance note provides comprehensive and up to date legal information covering:

  • Types of distribution—interest recharacterised as a distribution: special securities
  • Special securities
  • Meaning of principal sum secured
  • Special securities—conditions
  • Condition A—securities issued otherwise than for new consideration
  • Condition B—convertible securities
  • Condition C—results linked securities
  • Condition D—securities connected to shares
  • Condition E—equity notes
  • Exclusion from distribution treatment

Although the most common type of distribution is a dividend paid by a company to its shareholders in respect of their shares (ie a distribution of accumulated profits to the owners of a company) the term distribution has a much wider meaning for the purposes of corporation tax.

The Corporation Tax Act 2010 (CTA 2010) sets out the specific circumstances in which a company is treated as having made a distribution. In some cases, a payment labelled as interest can be recharacterised as a distribution for tax purposes.

The two main circumstances in which this can happen are:

  1. distributions in respect of non-commercial securities (category E), for which see: Types of distribution—interest recharacterised as a distribution: non-commercial securities, and

  2. distributions in respect of special securities (category F), discussed in this Practice Note

However, note that there are exclusions from the distribution treatment, see below: Exclusion from distribution treatment.

Interest and distributions are taxed differently in the hands of a corporate recipient. Interest income is likely to be taxed under the loan relationships regime whereas distributions fall outside the scope of the loan relationships regime. Normal distributions may be exempt (provided they fall within one of the exempt classes in Part 9A of CTA 2009) but 'interest' payments recharacterised as distributions cannot be exempt and will be taxed under normal principles.

From the paying company's perspective, interest