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Chapter 8 • Sources of long-term finance
Tax deductibility of preference share dividends
The UK tax system does not distinguish between ordinary and preference dividends,
so preference dividends, like ordinary share dividends, are not deductible from profit
for corporation tax purposes.Effect on control and on freedom of action
Normally, preference shares do not impose much by way of restriction on the ordinary
shareholders. Many preference shares give the holders the right to vote only where
their dividends are in arrears. Generally, preference shareholders have no voting rights.Factors for the potential investor to consider on preference shareholding
Level of return
The level of return to preference shareholders tends to be low, significantly below that
of equities of the same business. The return tends also to be entirely in the form of
dividends since preference shares do not normally experience significant changes
in values.Riskiness of returns
Typically, this risk lies between that attaching to ordinary shares and to loan notes.
This is mainly because preference dividends have priority over ordinary ones.Ease of liquidating the investment
Where preference shares are redeemable and/or traded in the capital market, liquida-
tion is possible. Failure for at least one of these to be the case will usually make
investors reluctant to take up preference share issues.Preference shares and personal tax
Dividends are taxed as income.Degree of control
Unless dividends are in arrears, preference shareholders typically have no voting
rights and hence no real power.Methods of raising preference share capital
The methods used to raise preference share capital are more or less identical to those
available with ordinary shares, including bonus issues to ordinary shareholders
created from retained profits. In practice, rights issues seem to be the most popular
method of issuing preference shares.8.5 Loan notes and debentures
Many businesses borrow by issuing securities with a fixed interest rate payable on the
nominal or face value of the securities (known as the coupon rate) and a pre-stated
redemption date. Such securities are known as loan notes, debentures, bondsor loan
stock. They are typically issued for periods ranging from 10 to 25 years, though some‘