IFM16240 - Scheme of reconstruction involving conversion scheme

Section 103I Taxation of Chargeable Gains Act 1992 (“section 103I”)

This section applies to schemes of reconstruction where investors have exercised their rights under regulation 12(1)(b) of The Undertakings for Collective Investment in Transferable Securities Regulations 2011 (“Regulation 12(1)(b)”).

Regulation 12(1)(b) applies where one collective investment scheme (the merging scheme) is being merged into another scheme (the receiving scheme). Investors in either scheme may require that their units be exchanged for units in a third scheme which has similar policies to the merging or receiving scheme and is managed by the same or an associated manager. Section 103I refers to that third scheme as “the conversion scheme”. In section 103I the term “scheme C” can refer to the merging scheme ‘A’ or the receiving scheme ‘B’.

Accordingly, an investor in scheme ‘A’ that does not want to exchange their ‘A’ units for units in scheme ‘B’ may instead require their ‘A’ units to be exchanged for units in a conversion scheme. On the other hand, an investor in scheme ‘B’ that does not want to take part in the scheme of reconstruction with scheme ‘A’ may instead require their ‘B’ units to be exchanged for units in a conversion scheme.

Under section 103I, where investors in scheme C ie investors in either scheme ‘A’ or ‘B’ exercise their right to exchange their units for units in the conversion scheme, chargeable gains rules apply as if scheme C and the conversion scheme were a single company which had reorganised its share capital - see CG51700C. In summary, the exchange of units in either ‘A’ or ‘B’ is treated as not a disposal for chargeable gains purposes and the new units are treated as having been acquired at the same time as the ‘A’ or ‘B’ units.

Section 103H only applies where the arrangements take place for bona fide commercial reasons and not for the avoidance of tax– see IFM16260.