A loan is taken out to buy shares in a close company. The shares carry a right to a dividend at a fixed rate but no other right to share in the company's profits. There is a right, exercisable periodically, to convert a proportion of the shares held to ordinary shares. Is interest allowable (under s383) from the off, allowable from conversion or never allowable?
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I'd say never reading S392. Loan's not been applied to "acquiring any part of the ordinary share capital of a close company".
Have a look at https://www.accountingweb.co.uk/tax/business-tax/how-to-recognise-an-ord....
Arguably the conversion right is "a right" to participate in future profits. If that is correct, the shares. are part of the "ordinary share capital
My initial view is that that interest is not allowable. To paraphrase s.392, the loan to the individual must be used to acquire any part of the ordinary share capital of a close company that is not a close investment-holding company.
At the time the loan is used to acquire shares (an historic, matter of fact test) those shares are not ordinary.
Who holds the right to convert the shares to ordinary shares - the Company, shareholder, or both?
If the right of conversion rested with the shareholder, and the Company had no power to prevent that exercise, I may be tempted to argue the shares are quasi-ordinary on acquisition, such that interest were allowable.
Only an opinion, however. I’m sure a greater mind will prove me wrong!
A further thought. What are the rights of the convertible preference shares on a winding up? If they are entitled to participate in any surplus at that time, they would technically be part of the"ordinary share capital".
Has the definition of OSC been amended generally (i.e. for the purpose of your question) following the recent Budget amendments? I thought those changes only applied for ER purposes?