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Are preference shares classed as debt and if yes can the company claim tax relief on the dividend payments (similar to interest on the loan notes).
I am thinking that they are debt as there is an obligation to pay the preference dividend as opposed to the ordinary dividend that is paid at the discretion of the issuer.
Thanks for your help.
Hello Philip, preference shares are not debt. Preference share holders aren’t paid fixed interest. Just for the fact that they are given preference over ordinary dividend holders when paying out dividend doesn’t mean they are debt.
Hope this helpsds766: Please don’t answer questions in this forum – it is the Ask the Tutor Forum, and you are not the tutor.
Philip: I think that you are confusing two things. Certainly in the presentation of the financial statements, redeemable preference shares are treated as debt.
However, legally it is not debt, and there is no tax relief given to the company on any dividends – be they ordinary or preference.Hi John,
Thank you for the clarification. When I was doing WACC questions I was unsure as to whether to apply tax relief to the cost of the preference dividend.
Thanks again.
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