CG73997S - UK property rich collective investment vehicles: Transparency election: Overview

An election under TCGA92/SCH5AAA/para 8 provides, subject to certain conditions being met, for offshore collective investment vehicles which are transparent for income tax purposes to elect to be treated as a partnership for the purposes of chargeable gains and related provisions. This paragraph is intended to apply to entities such as, ‘Baker’ unit trusts, Luxembourg or French fonds commun du placement (FCPs), and Irish common contractual funds (CCFs).

The transparency election is not designed for, and is unlikely to be suitable for, CIVs that are widely held and regularly change investors, as the effect of investors investing or disposing of interests is likely to trigger regular disposals of other investors’ interests in the underlying assets (see section 4 of Statement of Practice D12). HMRC would anticipate the likely users of this election to be smaller, joint-venture arrangements where the investors are predominantly or wholly exempt to type and/or are unlikely to change regularly. It may also be appropriate where the CIV is essentially a captive vehicle in the structure of a larger fund

The effect of the transparency election is to treat the offshore CIV as a partnership for the purposes of capital gains (and related provisions), with the result that –

• the CIV itself is not within the charge to tax on its gains;
• an interest in the CIV is not an asset for capital gains purposes, so the investors are taxed on disposals of the underlying assets of the partnership. When they dispose of their interest in the partnership, they will be disposing of their fractional interest in the underlying assets.
• Section 12AA Taxes Management Act applies and the CIV will be required to deliver an annual partnership return, providing the details of any disposals by the CIV of chargeable assets in the period

An investor who is exempt from capital gains would therefore be able to directly engage that exemption on disposal of assets by the CIV, as for capital gains purposes they will be disposing directly of those assets rather than the disposal being by the CIV.

Conditions for making the transparency election

The ability to make a transparency election is subject to the CIV being UK property rich at the time of the election, or having published scheme documents at that time clearly stating the intention of the CIV to invest predominantly in UK land such that it will be UK property rich.

Paragraph 8(1) states that it will apply to UK property rich CIVs that are transparent for income tax purposes except for partnerships (as an election would be unnecessary because partnerships are not deemed to be companies per paragraph (4)(1)(b))).

Paragraph 8(7) explains when a CIV would be considered transparent for income tax purposes. However, it does not attempt to define what makes a CIV transparent for income, that remains something to be determined by reference to case law principles. Instead, it assumes that analysis has already been applied and that as a conclusion of a CIV being transparent for income, a hypothetical UK resident individual invested in the CIV would be chargeable to income tax on his or her share of the vehicle’s income.

TCGA92/SCH5AAA/para 8(5) removes the need to consider whether or not an income transparent CIV would, on first principles, already be transparent for gains.