CG73998A - UK property rich collective investment vehicles: Transparency election: Effect of the transparency election on the investors

Under existing provisions in Chapter 3 of Part 3 of TCGA, UK resident investors will already have an interest in the CIV as an asset for the purposes of capital gains. The transition for investors between holding an interest in the CIV as an asset and holding an interest in the underlying assets, including UK resident investors under current rules, will be done by deeming the underlying assets to always have been so held for the purposes of calculating the gain. Statement of Practice D12, and principles such as those in section 43 TCGA, will assist in calculating any gain or loss when the investor or the CIV makes a disposal. There is no deemed disposal on making the election, and no need to substitute market value for base cost as a consequence of the disposal.

CGT at the upper rate on disposals of UK residential land will apply where, as a consequence of the transparency election, an investor is treated as making a direct disposal of an underlying asset of the CIV that is liable at that rate.

UK insurance companies

To prevent complexity and ensure insurers maintain the current tax treatment under section 212 of TCGA 1992, TCGA92/SCH5AAA/para 10 treats an election under paragraph 8 as having no effect from the perspective of any investors in the offshore CIV which are UK insurance companies holding the units for the purposes of their long-term business. The affected insurance companies will continue to hold an interest in the vehicle itself as a capital gains asset rather than in the underlying property of the vehicle. This is the only exception to the transparency principle once an election has been made.

Interaction with 30-day reporting and payment on account rules

Where a CIV has yet to make an election, it will remain opaque (as it is deemed to be a company) and chargeable on gains arising from its own disposals which it will need to report under normal CT self-assessment. Non-resident investors chargeable to Capital Gains Tax will therefore, at that stage, not be within the rules for 30-day reporting and payment on account (set out in Schedule 2 to Finance Act 2019) in respect of a disposal by the CIV. If the election for transparency is made, it has retrospective effect, so that a disposal by the CIV prior to the election being made would then become chargeable on the investor and as a result, if the CIV has not yet filed its CTSA return for the period in which the disposal took place, the CIV will not itself have to report the disposal.

In these circumstances, the investor’s 30-day time limit for reporting and paying tax on any gain begins on the day the election for transparency is sent to HMRC, rather than the normal time limits. Once the election has been made, the normal time limit applies.

The normal rules for the 30-day reporting and payment on account provisions will apply for any disposal by the investors themselves, regardless of whether the CIV is transparent (a disposal of underlying property) or opaque (a disposal of an interest in the fund itself).

Paragraph 10 Schedule 2 to the Finance Act 2019 also sets out an exception to the reporting requirements where a disposal has an appropriate connection to a CIV and there is no tax payable as a result of the disposal. This would normally apply where the investor’s total capital gains for the year is less than their relevant Annual Exempt Amount or the person is exempt from tax such as the trustees of a pension fund which satisfy the tax exemption condition (see PTM024400)