Cumulative Redeemable Preference Shares

Accounting and tax treatment of the Coupon and Premium

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Client has used an itermediary to invest in some Cumulative Redeemable Preference Shares with a fixed coupon. He has sold 20,000 shares at £1 each, for £25k. He has then suffered charges of £800 on the £25k. So he received £24,200.

These shares have a coupon of £4k per year.

My questions are,

1) How is the £800 treated? As he is due to repay the £25k

2) Does the £5000 go into share premium or the £4200

3) Is the coupon (£4K) tax deductible

Replies (14)

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By paul.benny
29th Nov 2023 16:14

The question makes no sense. Has Client bought, sold or issued these shares?

Thanks (4)
Replying to paul.benny:
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By johnhenry
29th Nov 2023 16:37

"He has sold 20,000 shares at £1 each"

He has sold the shares in his Ltd company.

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By johnhenry
29th Nov 2023 16:27

The client has received the investment into his Ltd company.

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RLI
By lionofludesch
29th Nov 2023 16:42

1) How is the £800 treated? As he is due to repay the £25k

Some sort of professional fees, presumably - what does the contract say?

2) Does the £5000 go into share premium or the £4200

£5000 - subject to point raised above.

3) Is the coupon (£4K) tax deductible

No. It's a dividend.

Thanks (1)
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By paul.benny
29th Nov 2023 16:52

I would check the documentation. It would be unusual to have to repay the premium.

You might also want to look at the reporting requirements for preference shares set out in FRS102 or FRS105. These should probably be reported as a liability and not equity.

Thanks (1)
Danny Kent
By Viciuno
29th Nov 2023 17:14

Should this be treated as a long-term liability under the FRS and the dividend a finance cost?

I don't know - never come across them in practice however this is ringing bells from my studies.

If not and it is equity, issue costs are offset against the share premium account under FRS102. I'd be leaning towards these not being tax deductible regardless of how they are presented though.

Thanks (1)
By Ruddles
29th Nov 2023 20:50

Have I got this right?

Limited company has bought redeemable prefs for £20k. The company has then sold them for £25k, less costs. If that is correct, why the mention of share premium?

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John Toon
By John Toon
01st Dec 2023 10:59

Cumulative redeemable prefs are usually a loan (but you don't say who can exercise the redeemable bit so that's critical) - debit or credit depending on who's bought/sold.

As others have said what was the £800 for? That determines the accounting treatment.

Sounds like they sold for a premium but then I don't understand why he repays the premium - that's not normal... You normally repay the par value. Either way it's likely a loan, so no equity. If he doesn't repay the premium then this is just interest that unwinds over the life of the prefs.

The interest is just that - accounted for and, I think, taxed as such but again depends on getting the initial accounting right.

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Replying to johnt27:
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By Tax Dragon
01st Dec 2023 11:24

What's the difference between a repayable premium on a loan and a loan? Or, more simply, how can there be a premium on a loan?

What actually has happened here? It still makes no sense. To me, anyway.

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Replying to Tax Dragon:
John Toon
By John Toon
01st Dec 2023 12:24

This is where the investors/lawyers get involved, but a redeemable pref is an equity instrument, even if it's not necessarily accounted as one. So it can be issued at a price above, potentially below, its par value.

You only have to look at the gilts markets to see loans (bonds) being traded above/below their nominal value usually because the coupon is better/worse than underlying interest/inflation, but the initial issue price would normally not carry a premium. With these types of investments the capital you get back, assuming it's secure, is always the par/bond issue value not any premium or discount you pay - hence my query.

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Replying to johnt27:
John Toon
By John Toon
01st Dec 2023 12:29

I should add, unless I've misread it, the OP reckons a £4k coupon on a £20k par value issue. That's a 20% interest return so not surprising that a purchaser would want to pay a premium over the issue price, but even more unusual to pay the coupon and return the premium...

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Replying to johnt27:
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By Tax Dragon
01st Dec 2023 12:41

My question was an accounting one - and possibly rhetorical, as you had answered it before I asked (there is no premium for accounting purposes).

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Replying to johnt27:
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By johnhenry
01st Dec 2023 14:54

The Client has sold the shares in his company, he was paid £25k for £20k of preference shares(He only received £24,200- agent fee was the £800). The shares have a redeemable date of 4 years, this can be extended at the discretion of the owner of the preference shares.

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Replying to johnhenry:
By Ruddles
01st Dec 2023 15:04

That still doesn't make sense. You started off by saying that the client invested, via an intermediary, in preference shares. You are now saying that the client sold the shares in his company, and that he was paid £25k for the preference shares. What did he receive for the shares in his company?

Can you please explain exactly who bought what from whom, and who subsequently sold what to whom.

Thanks (1)