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This publication is available at https://www.gov.uk/government/publications/taxing-gains-made-by-non-residents-on-uk-immovable-property-in-collective-investment-schemes/taxing-gains-made-by-non-residents-on-uk-immovable-property-in-collective-investment-schemes
This HMRC Technical Note builds on the outline in the Annex to the Response Document ‘Taxing gains made by non-residents on UK immovable property’, which was published on 6 July 2018. The Annex to the government’s response proposed a framework for the specific application of the rules to certain collective investment vehicles and those investing in such vehicles.
This Technical Note will be of interest to collective investment vehicles investing predominantly in UK real estate, and those holding an interest in such vehicles. The majority of the policy impacts non-UK residents, but there are also impacts on UK resident collective investment vehicles and on UK resident investors.
This Technical Note and the Response Document should be read alongside one another, as well as the published legislation, to ensure the full context of the policy is clear. The approaches outlined in this document have been informed by detailed technical feedback from industry, both written and over a course of meetings with relevant representative bodies and advisor groups.
Chapter 1 - Background to the measure
On 22 November 2017 the government released a consultation document seeking views on proposed rules to expand the UK’s tax base with respect to non-UK residents’ gains on disposals of interests in UK immovable property.
The consultation document explained that from April 2019 non-UK residents would be taxed on gains on disposals of interests in non-residential property and disposals of interests in UK property-rich entities, and that the rules would apply to all persons.
Only those persons who are currently not liable to UK tax on capital gains, for reasons other than being non-UK resident, would be outside of the charge.
The new rules expand on the current UK rules that tax individuals, trustees, personal representatives, and close companies on disposals of interests in residential land. The consultation noted that the new and old rules would be aligned for a more coherent system.
The vast majority of respondents expressed sympathy with the government’s aims of levelling the playing field and simplifying the existing rules affecting non-UK residents in this area.
Many of the same respondents were also cautious, however, about the possibility of making the UK commercial real estate market less competitive in terms of inward investment, particularly in creating complex and burdensome rules and creating unfair tax outcomes.
By far the largest area of focus in technical responses was on the treatment of collective investment vehicles, and of exempt investors such as pension schemes. There was significant concern that investment in UK real estate would be impacted negatively if, under the proposed rules, currently exempt investors were left exposed to tax at lower tiers of investment.
Further, responses highlighted that investors in collective investment vehicles were likely to suffer multiple tax charges on the same disposal due to the structures used and commercial practice in this area.
It was also highlighted that exempt UK investors, such as UK pension funds, made significant investment in the UK real estate market through offshore funds, and would be impacted in the same way.
Following the consultation, draft legislation was published on 6 July 2018 containing the core provisions implementing these rules. This was accompanied by a Response Document which explained the rationale for the provisions.
An Annex to the response outlined a framework for how the rules would apply to collective investment vehicles, and invited comments and input from industry.
An intensive round of technical consultation was held with relevant industry groups, as well as other interested parties. Input was also obtained from written responses and subsequent correspondence.
This document accompanies publication of further legislation which provides for the application of the rules to collective investment vehicles investing predominantly in UK land, and those holding an interest in such vehicles. The legislation inserts a new Schedule 5AAA to the Taxation of Chargeable Gains Act (TCGA) 1992, in which all of these rules are contained.
The new rules will apply to gains on disposals occurring on or after 6 April 2019.
Chapter 2 - Scope of these rules
Scope of the rules and definitions
The scope and key definitions are contained in Part 1 of the new Schedule 5AAA. The legislation and this Technical Note refer to Collective Investment Vehicles (CIVs) to cover all of those in scope.
CIV includes ‘collective investment scheme’ in section 235 of the Financial Services and Markets Act 2000, and Alternative Investment Funds (AIFs) as defined in regulation 3 of the Alternative Investment Fund Managers Regulations 2013 (SI 2013/1773).
To the extent that they are not already covered by AIF, CIV also includes UK Real Estate Investment Trusts (REITs) within Chapter 12 of Corporation Tax Act 2010, and companies that meet a description intended to include the overseas equivalents of UK REITs.
3.For the purposes of the application of these provisions, UK REIT equivalence has these hallmarks:
3.1. The company is not close, or is only close because of control by a ‘qualifying investors’ (see Chapter 5)
3.2. At least half of its income is property income from long term investments
3.3. It annually distributes all, or substantially all, of its property income from long term investments
3.4. It is not liable to tax on that income under the law of any territory in which it is resident
4.This is adapted from the OECD definition, with appropriate modifications for the policy. The legislation does not refer to this as a REIT equivalence test, and it should not be taken to affect the meaning of UK REIT equivalent as used elsewhere (including in Qualifying Investors).
5.The majority of the rules outlined in this Technical Note apply only to CIVs that are UK property rich - this is defined within Part 1 of Schedule 5AAA, and mirrors the meaning in the new Schedule 1A to TCGA, which was published in draft on 6 July 2018. Broadly, a CIV is UK property rich if 75% or more of its gross asset value derives from UK land. UK land is defined in the new section 1C of TCGA.
6.Different aspects of the rules will then have supplementary definitions and requirements as detailed in the relevant Chapters of this Note.
The transparency and exemption elections
7.The two elections detailed in this Technical Note are designed to address the key issues identified in the consultation and noted in the Annex to the Response Document: taxation of exempt investors, and multiple charges at different tiers in funds.
In some cases either election would be suitable, but in most the circumstances will define which approach is appropriate. Both elections are explained in detail in their respective Chapters of this Note. This section gives an overview of the differences between them.
The transparency election
8.The effect of the transparency election is to treat the offshore CIV as a partnership for the purposes of capital gains (and related provisions), thereby ensuring that the investors are taxed on disposals of the underlying assets of the partnership.
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 the CIV itself will not be a taxable person. This election is only available to CIVs that are income-transparent.
9.It is likely that transparency will not be appropriate for CIVs that have regular changes of investors, as these changes may trigger regular disposals of other investor’s interests in the underlying assets 1.
From discussion with industry during the consultation, the likely users of this election will be smaller, joint-venture arrangements where the investors are predominantly or wholly exempt investors.
It may also be appropriate where the CIV is a captive vehicle in the structure of a larger fund, and the entities holding an interest in the CIV wish to be able to treat the underlying assets as being
The exemption election
10.Under the election for exemption, the CIV remains a person and notionally chargeable to tax on its gains. The election exempts the CIV from this tax. The investors are already chargeable on their gains on disposals of interests in the CIV. This election is likely to be used mainly by widely held funds with large structures and, again, particularly where the investors are exempt and wish to prevent tax charges in the fund itself that will impact on their returns.
11.The reporting and other requirements imposed on the CIV making the exemption election may make it unattractive to some smaller joint venture arrangements. The exemption election also has requirements of the CIV - for example closely held CIVs will not be able to make this election.
Interaction with SI 2017/1204 and section 103D TCGA
12.The provisions of section 103D of TCGA will still apply from the perspective of UK resident investors in funds within those provisions.
13.Where a fund also falls within the scope of Schedule 5AAA, the rules relating to UK land will have an impact on the treatment from the perspective of both non-UK resident investors, and the fund itself.
14.The treatment under section 103D is also subject to the transparency election detailed in Chapter 4 of this Note.
From the perspective of non-UK resident investors
15.Non-UK resident investors will view funds falling within both section 103D(1)(b) (offshore tax transparent funds) and Schedule 5AAA as companies and treat interests held in them as shares in a company. Thus if a fund within section 103D(1)(b) is UK property rich by the measure in the new Schedule 1A to TCGA, a disposal of an interest in that fund will be a disposal of an interest in a UK property rich asset.
16.Non-UK resident investors will view units in a Co-ownership Authorised Contractual Schemes (CoACS) (section 103D(1)(a)) as being shares in a company for the purposes of considering whether the indirect disposal rules in the new Schedule 1A to TCGA will apply.
Impact on the funds in section 103D and Schedule 5AAA
17.A fund falling into both section 103D(1)(b) and Schedule 5AAA will be taxable as persons and liable to Corporation Tax if they make disposals of interests in UK land, whether or not they are UK property rich.
18.UK CoACS will remain to be treated as not being persons, so not liable to tax on their disposals. Deeming interests in them to be shares from the perspective of a non-UK resident investor is done purely for the purposes of considering whether those investors hold an interest in a UK property rich asset. These funds are already required to report to HMRC, and must be meet tests meaning they will be widely held.
19.The calculation rules in section 103D(4) to (9) and the share pooling rules in section 103DA remain in place where Schedule 5AAA applies and the CIV is treated as a company.
Chapter 3 - The default rules for collective investment schemes
21.These rules are contained in Part 2 of Schedule 5AAA.
Default treatment for non-resident CIVs
22.The default treatment of non-resident CIVs will be that they are companies for the purposes of TCGA, so will be persons and chargeable to Corporation Tax on their gains.
The majority of the rules applicable to companies will apply to CIVs. Many of the rules regarding UK property rich CIVs in the new Schedule 5AAA are framed in terms of applying to companies, though there are places where the rules apply to actual companies and this is made clear.
Paragraph 2 of Schedule 5AAA defines whether a CIV is non-UK resident (using the term offshore) using existing provisions.
23.This default treatment is subject to the elections detailed in Chapters 4 and 5. CIVs which are partnerships on first principles will remain transparent for gains.
24.The Corporation Tax grouping rules and similar provisions recognise the economic unity of a business that is spread across different legal persons. CIVs investing in UK land are vehicles for collective investment, and are not trading entities.
The deeming provisions will not go as far as treating them as having Ordinary Share Capital, so they will not be able to rely on provisions that require a relationship to be established between a parent and subsidiary, or common subsidiaries of a parent, through ownership of Ordinary Share Capital.
Impact on investors in UK property rich CIVs
25.Non-UK resident CIVs which are UK property rich will be treated as companies, and interests in them as shares. Any disposal by a non-resident investor will be chargeable as a disposal of an interest in a UK property rich company in accordance with the new Schedule 1A to TCGA published in draft on 6 July 2018.
26.Non-resident investors in CIVs that are UK property rich will be considered to have a substantial indirect interest in UK land, so will be chargeable on gains on disposals of an interest in a UK property rich CIV regardless of their level of investment in the CIV – they will not benefit from the 25% ownership exemption (the rules for which are in Part 3 of the new Schedule 1A). This will be the case for investment in both non-UK CIVs, and UK resident CIVs such as UK REITs and Property Authorised Investment Funds.
27.Non-resident investors in a company that is not a CIV but that derives at least half of its market value from one or more CIVs (so that that entity cannot be UK property rich without reference to those CIVs) will also be considered to have a substantial indirect interest in UK land and will therefore not benefit from the 25% ownership exemption.
28.CIVs, and companies that are UK property rich and at least 50% invested in my one or more CIVs, are also considered to have a substantial indirect interest in UK land when disposing of a UK property rich company. This would include, but not be limited to, situations where a partnership CIV is so invested in a company.
29.Non-resident investors will not be considered to have a substantial indirect interest in UK land where they are investing in a CIV that meets a Genuine Diversity of Ownership condition (as in regulation 75 of The Offshore Funds (Tax) Regulations 2009 (SI 2009/3001)) or meet the non-close condition (see Chapter 5 of this Note), and that CIV is being marketed with a policy of not investing more than 40% in UK land.
Even if a disposal is of a UK property rich company (due to circumstances at a given time), the investors will not be considered to have a substantial indirect interest in UK land. This caveat will not apply where the disposal is by a partner in a CIV partnership.
Chapter 4 - The election for transparency
30.These provisions are contained in Part 3 of the new Schedule 5AAA.
Overview of the election for transparency
31.Non-UK resident, UK property rich CIVs that are transparent for income will be able to elect to be treated as transparent for gains. Once made, the election cannot be withdrawn.
32.Under the election, the CIV will be treated as a partnership for the purposes of TCGA, so that the investors will be treated as if they directly held an interest in the underlying assets of the fund. The transparent treatment will apply for all investors in the fund, both UK and non-resident.
33.The TCGA rules for partnerships and the principles of Statement of Practice D12 will apply to assist in calculating the gains of the investors.
How and when the election must be made
34.The election can be made by the fund manager, and must be accompanied by the consent of all of the investors in the fund at the time of making the election. The election must be made within 12 months of the CIV first acquiring a direct interest in UK land or an asset that is UK property rich. In the case of a fund existing at 6 April 2019, the election must be made by 5 April 2020.
35.Consent may be assumed where it is evident that it has been made clear to investors that they are buying an interest in a fund that intends to make a transparency election.
36.The election will have retrospective effect to cover any disposals by the CIV from commencement of the non-resident gains rules on 6 April 2019, or if the CIV is formed after that date, from the date it is formed.
37.The CIV will need to either be UK property rich at the time of the election, or have published scheme documents at that time clearly stating the intention of the CIV to invest predominantly in UK land.
38.It is not necessary for there to be legal certainty about whether the CIV would already be transparent for gains.
39.If the investors in the CIV change, or it ceases to be 75% UK property rich, it will remain a partnership for gains. There will be no need to make a new election or provide the consent of the new investors, who should be aware of this when they acquire an interest in the CIV.
Interaction with rebasing rules in Schedule 4AA TCGA
40.Where a non-resident investor has an interest in a CIV at 6 April 2019 which makes an election for transparency, their rebasing date for the purposes of the new Schedule 4AA when making a disposal of any underlying assets of the CIV will be 6 April 2019, regardless of whether the asset itself would have a different rebasing date if it had always been held directly.
Effect of the election on UK tax resident investors
41.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.
42.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.
Interaction with 30 day reporting and payment on account rules
43.Where a CIV has yet to make an election, it will remain opaque and chargeable on gains arising from its own disposals. 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 Bill 2019) in respect of a disposal by the CIV. The election for transparency has retrospective effect, so that a disposal by the CIV will become chargeable on the investor.
44.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.
45.Once the election has been made, the normal time limit applies.
46.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 (so a disposal of underlying property) or opaque (so a disposal of an interest in the fund itself).
Chapter 5 - The election for exemption
47.These rules are contained in Part 4 of Schedule 5AAA.
48.The election for exemption is not available to all Alternative Investment Funds, only to non-resident companies that are the equivalent of UK REITs as set out in Chapter 1 of this Note (some of which may not be AIFs). All Collective Investment Schemes are in scope for this election.
49.Regardless of whether the CIV is within the exemption regime or not, the investors remain taxable under first principles on any disposal of an interest in a CIV that is a UK property rich entity.
Overview of the election for exemption
50.Eligible CIVs meeting certain qualifying definitions and which commit to report certain information annually to HMRC can make an election that provides exemption for the CIV itself and for entities in which it has at least a 40% investment. The CIV must be UK property rich.
51.The election can also be made by a CIV which is a partnership (based in any jurisdiction, including the UK), in respect of one or more companies that it owns at least 99% of and which are UK property rich - it may also be made by a UK CoACS in respect of one or more companies that it owns at least 99% of if the CoACS is UK property rich. Such companies invested in by the partnership or CoACS cannot be CIVs, but may be resident anywhere.
52.In all cases other than where the CIV is a partnership or a CoACS, the CIV making the election must be non UK resident. There are existing special regimes for other types of UK funds in relation to taxing gains on UK land.
53.The entities in which the CIV has an interest may be UK or non-UK resident. They may be bodies corporate, or companies because of the default treatment of non-UK resident CIVs. The exemption only covers direct or indirect disposals of UK land. It is possible for a UK partnership CIV or a CoACS which has a structure of UK resident companies under it to make the election.
54.The CIV must have an investment of at least 40% in an entity for that entity to benefit from exemption. Where the investment is less than 100% the gain or loss is exempted proportionately to the level of investment the electing CIV has in the entity. The level of investment is established using the tracing rules in paragraph 9 of Schedule 1A.
55.The CIV must meet certain qualifying conditions for the election to have effect. If the circumstances of the CIV change so that it does not meet the conditions, this will trigger a deemed disposal and reacquisition of the interests of the investors. In some circumstances any gains triggered by the deemed disposal will be brought into charge immediately, and in some the gain will not come into charge until the investors receive funds from the CIV, the CIV winds up, or a period of three years elapses (whichever is earliest).
56.The effect of ceasing to meet the qualifying conditions or ceasing to be property rich is explained under the headings for the conditions, and summarised in the table at the close of Annex 1.
Making the election
57.The election must be made by the CIV manager. It must be made to HMRC, and provide the name and address of the CIV making the election, and the names and addresses of entities included in its structure and the level of interest the CIV making the election has in them. HMRC will publish forms for this in due course.
Election where the CIV is a partnership or a UK CoACS
58.In the case of a CIV partnership, the election may be made in respect of companies in which it has a 99% or greater interest. The companies may not be CIVs themselves.
The CIV partnership need not be UK property rich, but the investors’ interests in the company directly underlying the CIV partnership must be an interest in a UK property rich asset (so the companies must be UK property rich).
CIVs that have made the transparency election detailed in Chapter 4 of this Note are eligible as partnerships for this election.
59.The CIV partnership may make an election in respect of one or more companies that it directly controls, providing the qualifying conditions are met by each company.
60.UK CoACS may also make an election on behalf of companies they control. Purely for the purposes of applying these rules and considering whether the fund and underlying companies qualify, the CoACS is treated as transparent for gains.
It is the CoACS that must be UK property rich to meet the eligibility requirements for the election as (unlike for the partnership) it is the CoACS’ units not the shares in the underlying companies that are capital gains assets in the hands of the investors.
61.The 40% minimum interest required for an entity in the fund structure to be eligible for exemption is considered in respect of ownership by the company for which the election has effect.
62.The CIV must meet the following qualifying conditions for the election to have effect at a given time. These conditions are described in more detail below.
62.1.1. The CIV is a collective investment scheme and it meets the genuine diversity of ownership condition
62.1.2. The CIV is a body corporate and it meets the recognised stock exchange condition and the non-close condition, or
62.1.3. Any CIV meets the UK tax condition and the non-close condition
62.2. The CIV must have made reports to HMRC of disposals of interests in it by investors within the 24 months prior to the disposal requiring exemption - no reports are required in respect of disposals of interests in the CIV occurring prior to 6 April 2019.
62.3. The CIV must be UK property rich.
63.Where a CIV ceases to meet any of the conditions, this will trigger a deemed disposal and reacquisition of the interests of all the investors in the CIV.
If there are multiple reasons why there would be a deemed disposal and reacquisition, all of the deemed disposals and reacquisitions occur.
In some cases any gain arising will become chargeable immediately, in others the gain will be chargeable at the point where the investor receives a return of value from the CIV.
This is explained below, and summarised at the end of Annex 1.
64.In the case of an election being made by a partnership CIV or CoACS on behalf of companies underlying it:
64.1.1. The collective investment scheme which owns more than 99% of company meets the genuine diversity of ownership condition, or
64.1.2. The company must meet the UK tax condition and the non-close condition
64.2. The CIV must have made reports to HMRC of disposals of interests in it by investors within the 24 months prior to the disposal requiring exemption - no reports are required in respect of disposals of interests in the CIV occurring prior to 6 April 2019.
64.3. The company must be UK property rich where the CIV is a partnership, and the CoACS must be UK property rich otherwise.
65.A notification must be sent to the investors in the case of certain deemed disposal and reacquisition triggers. This is explained below.
UK property richness
66.If the CIV ceases to be UK property rich the exemption is revoked at the point the CIV ceased to be UK property rich (but see below on ceasing to meet the conditions and temporary periods).
67.The deemed disposal occurs immediately before the CIV ceases to be UK property rich as a question of fact, rather than when the CIV becomes aware that it is no longer UK property rich. HMRC would expect that CIVs meeting the conditions for the exemption election would regularly value their assets and would know within a reasonable timeframe following the point where mechanically the CIV was no longer UK property rich.
Ceasing to meet the qualifying conditions
68.Where a CIV ceases to meet any of these conditions the election remains valid for exemption for up to 30 days if the CIV intends to meet one of the tests within that time and does so. There can be no more than four such breaches in a rolling 12 month period - a fifth or subsequent will not benefit from the temporary period. This 30 day temporary period does not apply to ceasing to be UK property rich.
69.There is also a temporary period valid for exemption for up to nine months if the CIVintends to meet the relevant condition within that time and does so. If the CIV does not meet the conditions again within that time then the exemption election is considered to have ceased to have effect at the point the CIV no longer met them. UK property richness is included in the nine month temporary period.
70.Where the manager of the CIV is actively winding the fund up, the exemption continues to have effect even where the conditions are not met.
71.When the election ceases to have effect (because the conditions are no longer met, or the election is revoked) there is a deemed disposal and reacquisition of all of the investors’ interests in the CIV immediately before the point the election ceases to have effect. Other than in a case of revocation of the election, any tax payable on gains arising from the deemed disposal is not due until funds are paid to the investor in respect of their interest in the fund, a period of three years elapses from the deemed disposal, or the fund winds up.
72.Where a CIV meets one of the tests again after a deemed disposal and reacquisition, the three year time limit is switched off. So any deemed gain will only be chargeable when an investor receives funds from the CIV. If the CIV again ceases to meet the condition, there is another deemed disposal and reacquisition, and the rules above apply again.
73.Where a CIV ceases to meet any of the conditions (other than UK property richness) for a period of 30 days or less there is no deemed disposal. There can be no more than four such breaches in a rolling 12 month period.
74.The deemed disposal still occurs where the CIV meets the requirements for the nine month temporary period to retain the effect of the election.
Other applicable exemption conditions
The Genuine Diversity of Ownership condition
75.Genuine Diversity of Ownership is defined as in regulation 75 of The Offshore Funds (Tax) Regulations 2009 (SI 2009/3001). There is existing HMRC guidance on this.
The non-close test
76.The non-close test is modelled on section 528(4) and 528(5) of Corporation Tax Act 2010, which applies to UK REITs. A CIV is accordingly close if it is controlled by five or fewer participators. If the non-close test would be failed only because of the inclusion of qualifying investors, then the CIV is not regarded as close for this purpose.
77.Qualifying investors are as for the list in section 528(4A), and also includes a person subject to an exemption election under Part 4 of Schedule 5AAA. Unlike section 528, there are requirements that certain investors must, themselves, either not be close or meet the genuine diversity of ownership test:
77.1. Authorised unit trust schemes (UK and otherwise) (528(4A)(a))
77.1. Authorised unit trust schemes (UK and otherwise) (528(4A)(a))
77.2. Open ended investment companies or their overseas equivalents (528(4A)(b))
77.3. Limited partnership collective investment schemes (528(4A)(c))
77.4. UK REITs or their overseas equivalents (528(4A)(i))
78.UK REIT equivalence takes its existing meaning, not that in these rules (although a company that met the UK REIT equivalence test to be a CIV could become a qualifying investor if they are subject to an exemption election under these rules).
79.Unlike the test in section 528 the non-close test for the exemption election allows a look-through of immediate investors to establish whether control is ultimately established through institutional investors.
The look-through must be through bodies corporate. For example a company which is a direct investor in the CIV could count toward the level of control held by qualifying investors if it were itself owned by sufficient qualifying investors. Control is a mathematical measure for this purpose.
The UK tax condition
80.To meet this test the manager of the CIV must reasonably believe that, should all of the assets of the fund be liquidated and the proceeds returned to investors at that point, no more than 25% of the total value so returned would not be subject to UK tax in the hands of the investors because of the allocation of taxing rights under Double Tax Treaties.
81.This percentage is to be calculated with regard to the holdings of all of the investors in the fund, including exempt investors and taxable UK resident investors. So where a manager can be sure that more than 75% of the investors are UK residents and, or, exempt investors, they can meet the condition.
82.In many cases the manager will have no reason to know the tax residence of its investors, particularly for funds already in existence at 6 April 2019. The manager is not required to obtain information in order to perform a test of this condition, but if they are aware of the tax residence of their investors for other reasons - such as for due diligence, the Common Reporting Standard, or Anti Money Laundering procedures then they should use the information they hold in order to establish whether the condition is passed.
The taxable payment condition
83.As the effect of the election is to exempt gains in the fund and structure, the regime is designed to ensure that the return of value to investors is made in a form that is taxable in the UK.
If the CIV, particularly in the case of corporate funds, pays dividends to the investors that represent value deriving from gains on UK land, the value of those gains is not therefore represented in the asset held by the investors when they subsequently make a disposal of their interests.
84.If the CIV makes a return of value, in the form of income, to investors representative of gains on disposals of UK land there is a deemed disposal and reacquisition of the investors’ interests in the CIV. An example would be that the fund paid a dividend that in part represented the capital value derived from selling a company that was UK property rich.
85.The disposal occurs immediately before the payment is made and reacquisition immediately after. The payment must not be otherwise liable to UK tax in the hands of the investor for the rule to trigger.
86.This deemed disposal is only in respect of the investors to whom the rule applies –so for example where a payment is made in the form of an income distribution to all the investors but some investors paid tax on that distribution those investors would not be affected by the rule.
87.Any tax payable on gains arising from the deemed disposal is not due until funds are paid to the investor, with any balance left coming into charge when the fund winds up. The payment itself is a trigger for this.
88.The election continues to have effect despite the payment.
Reporting of investor disposals
89.One of the conditions for the election to have effect is that the CIV must have made reports to HMRC of any disposals by investors for a period of 24 months prior to date on which the disposal requiring exemption is made (or from the point where the fund was constituted if later).
It is not necessary for the CIV to meet all of the conditions at the point it begins making such reports.
90.No disposals prior to 6 April 2019 need to be reported.
91.HMRC may make provision for what is to be reported in respect of the participants in the CIV, and information or documents in respect of the provision of Schedule 5AAA and TCGA.
More details of the content of the report are in Chapter 6 of this Note.
92.Reports must be made to HMRC within twelve months of the end of the period to which they pertain.
93.A designated officer of HMRC may revoke the election for exemption if there are significant breaches in reporting without reasonable excuse2, or waive a breach even without reasonable excuse.
Significance will be judged with regard to the number and seriousness of the breaches. The situations HMRC will consider serious are set out in the section on incorrect reporting in Chapter 6. The revocation is appealable.
94.Where the election is revoked, a deemed disposal and reacquisition of all the investors’ interests in the CIV will occur immediately before the revocation.
Revocation of election
95.As well as for incorrect reporting, a designated officer of HMRC may revoke an election for exemption if they consider it appropriate in order to safeguard the public revenue.
This revocation must be given in writing to the manager of the CIV. HMRC will publish guidance on what situations will be likely to trigger this event. The revocation is appealable if the grounds of it are unreasonable.
96.The manager of the CIV may also revoke the election by notice in writing to HMRC.
97.Where the election is revoked, a deemed disposal and reacquisition of all the investors’ interests in the CIV will occur immediately before the revocation. Tax on any gain so arising is immediately brought into charge.
Calculation of the gain or loss on a deemed disposal and reacquisition
98.Where a CIV ceases to meet the conditions or withdraws its election, there will be a deemed disposal and reacquisition of all of the investors’ interests in the CIV.
99.The basis of the gains or losses on such a deemed disposal will be the market value of the interest at that point. This amount can be adjusted (most commonly in the case of a winding up) to allow for expenses that the CIV manager would reasonably expect to incur subsequent to the deemed disposal.
100.Any changes to the value of the CIV’s assets after the deemed disposal will not be factored into the gain or loss calculated at the point of the deemed disposal and reacquisition, only allowable expenses.
Notification to investors on the event of a deemed disposal
101.In some cases where there is a deemed disposal and reacquisition due to one of the rules above the manager of the CIV must notify all of the investors that this has happened. These notifications must be made within 30 days of the event leading to the deemed disposal. Failure to make a notification means the fund manager is liable to a fixed penalty of £3,000 in respect of the failure overall - the penalty may be appealed.
102.The cases where a notification is required are where a gain has come into charge but the investors may not be aware of the gain - this is:
102.1. Where the balance of a deferred gain has come into charge at the end of a three year period or because the fund has wound up
102.2. Where a payment of a revenue nature has been made but it includes capital cvalue which may trigger a deemed disposal for particular investors
102.3. Where either HMRC or the fund manager has revoked the election and the gain on the deemed disposal comes immediately into charge
103.Given that the deemed disposal will in some cases mean that the investors are immediately liable to pay tax on the gain, and in some that they will later become liable, the CIV may wish to supplement the notification to cover the circumstances. There is no legal requirement to do so.
104.For the case where a revenue payment contains a capital element, the fund manager may not know whether the investor is impacted (as they may pay UK tax on that payment). The fund manager must still notify them so that the investor is aware that there may be a capital gains liability.
105.In the case of a deemed disposal and reacquisition, investors in the CIV who are required to make a return and payment on account to HMRC within 30 days of making a disposal of UK land will instead have 30 days from receiving notice of the deemed disposal to make a report and payment.
Investment into an elected CIV by institutional investors
106.Qualifying institutional investors, as listed in paragraph 30A of Schedule 7AC to TCGA, will be able pass down their exemption, immunity, or similar non-taxable status with respect to gains to wholly owned companies that are invested in the CIV making the election. The list in paragraph 30A is supplemented with respect to life insurance companies.
107.A company that is directly investing in the CIV making the election will be exempt on any gains arising from disposal of an interest in the CIV, providing that all of the participators in the company would themselves not be liable to tax on the gain by reasons of exemption or immunity.
Prioritisation of exemptions
108.Under these rules, a company may derive its exemption from being owned by a qualifying fund or company.
Similarly, a company may derive exemption from being owned by qualifying institutional investors (under paragraph 3A of Schedule 7AC to TCGA), or because it is a UK REIT (under Part 12 of the Corporation Tax Act 2010, including Chapter 10 for joint venture companies).
109.Where the same investor is supplying more than one exemption, the order of prioritisation is that Schedule 7AC comes first, then the REIT exemption, and then exemption under Schedule 5AAA.
110.Where different investors provide separate exemptions to a joint venture company the exemptions may add together (but may not exceed the total of the gain or loss).
Chapter 6 - Reporting for the exemption election
111.HMRC may make provision for the contents of the report through guidance. This Chapter sets out the guidance for what is expected to be reported.
112.Where there is a change to what is listed below, this will be discussed with relevant representative bodies beforehand and notice provided of the change.
Contents of the report for CIV established on or after 1 June 2019
113.For CIVs set up on or after 1 June 2019, the report should contain the information listed below. The report should be accompanied by a statement that the CIV meets the qualifying conditions for the period the report covers, or in the case of a report where the exemption is not being claimed for the period, the conditions that are met.
114.There is no legislative significance to 1 June 2019. This date is to allow for a period of time after the rules come into force. Information in respect of the CIV making the election and entities in its structure.
Information in respect of the CIV making the election and entities in its structure
114.1. Name and address of the CIV making the report (the ‘top-level’ entity)
114.1.1. Total value of disposals by the top-level entity in the period (or £Nil)
114.1.2. Overall gain or loss on disposals (if appropriate)
114.2. Name and address of entities in the structure under the top-level entity which are covered by the exemption, and for each of the entities:
114.2.1. The percentage interest the top-level entity holds in them
114.2.2. The total value of their disposals
114.2.3. Overall capital gain or loss on their disposals
Information in respect of the investors in the CIV making the election
114.3. First name and surname or company name of all investors, and for each of those investors so reported:
114.3.1. Their address
114.3.2. Their UK Capital Gains Tax Unique Taxpayer Reference (if held)
114.3.3. Their UK Corporation Tax Unique Taxpayer Reference (if held)
114.3.4. The total value of their disposals
114.3.5. Their overall capital gain or loss (if this is calculable)
114.3.6. Whether the investor is not liable to UK tax on the disposals by reason of exemption, immunity, or other similar status (if held)
115.For the total value of disposals, the CIV must report on the basis of information it can reasonably be expected to obtain given the terms of its agreement with the investor and the information it has available.
This would at the least be any redemptions made by the investor in respect of their interest in the top-level entity, but in some cases may be secondary market transactions where the CIV’s agreement with the investor would mean this information is available.
Contents of the report for CIV established before 1 June 2019
116.Established CIVs may be restricted in disclosing personal information about their investors under their local information law, and not have terms in their agreement with the investors that allows them to override those restrictions.
117.To the extent that they are prevented from providing information to HMRC for legal or regulatory reasons, or because of the contractual impediments of their agreement with the investors, there are easements to what is required to be reported in respect of the investors.
118.In general, provision of information is subject to reasonable excuse. If an existing CIV - set up without being able to take account of these requirements - legally cannot obtain information pertaining to an investor because of existing agreements or local law or regulations, it is reasonable that they not be able to supply that information to HMRC.
119.All information in respect of the CIV making the election itself and entities in its structure must still be reported.
120.Subject to the above, the the following information regarding the investors must always be supplied in the report.
120.1. First name and surname or company name of investors who have disposed of an interest in the CIV in the period covered, and for each of those investors so reported:
120.1.1. Their address
120.1.2. Their UK Capital Gains Tax Unique Taxpayer Reference (if held)
120.1.3. Their UK Corporation Tax Unique Taxpayer Reference (if held)
120.1.4. The total value of their disposals
120.1.5. Their overall capital gain or loss (if this is calculable)
120.1.6. Whether the investor is not liable to UK tax on the disposals by reason of exemption, immunity, or other similar status (if held)
121.The other information in respect of the remaining investors must also be supplied where there is no legal, regulatory, or contractual restriction on the CIV doing so.
Failure to make a report
122.An Officer of HMRC may allow an extension to the time limit where there is a reasonable excuse. If an extension is agreed then the election remains valid and there is no deemed disposal and reacquisition.
123.In general, HMRC will expect the CIV to take reasonable care to ensure that information reported to HMRC is complete and correct.
124.An officer of HMRC may revoke the election for exemption if there is a serious breach of the reporting requirements. Where the election is so revoked, there will be a deemed disposal and reacquisition of all of the investors’ interests in the fund which occurs immediately before the revocation.
125.Where there is a reasonable excuse, the election will not be revoked. Otherwise, HMRC will consider the number and seriousness of breaches made in reporting.
126.HMRC will consider there to have been a serious breach where the CIV reports incorrect information with respect to the disposals by any investor who is taxable and:
126.1. Who holds a 25% or greater interest in the CIV, or
126.2. The value of whose investment in the CIV is £1,000,000 or greater
127.In other circumstances, a designated officer of HMRC may revoke the election if the information provided is consistently incorrect to a significant degree, and in particular with regard to information on the disposals by investors.
Annex 1 - Summary of key conditions
Overview of requirements and scope of rules
Removal of 25% ownership exemption:
128.Covers Collective Investment Schemes, Alternative Investment Funds, UK REITs, and companies broadly equivalent to UK REITs
129.The disposal is of a UK property rich company and is connected to collective investment
130.The investor is non-UK resident
131.The CIV may be tax resident anywhere
Ability to elect into transparency for gains
132.Available to CIVs which are transparent for income
133.The CIV is UK property rich at the point of the election, or sets out an intention to be in marketing material
134.Investors may be tax resident anywhere
135.The CIV must be non-UK tax resident Ability to elect for exemption
Ability to elect for exemption
136.Available to Collective Investment Schemes and companies that are equivalent to UK Real Estate Investment Trusts
137.The CIV or company it 99%+ owns must remain UK property rich
138.The CIV, and in some cases company, must meet the qualifying conditions
139.The investors may be tax resident anywhere
140.The CIV must be non-UK resident, unless it is a partnership or CoACS
141.Entities in the structure may be tax resident anywhere
Summary of information relating to ceasing to meet qualifying conditions or breaching reporting requirements
|Breach of requirements||When exemption is withdrawn||When deemed disposal of investors’ interests arises||When gains on a deemed disposal are charged|
|Ceasing to meet the applicable exemption conditions||At the point the CIV ceases to meet at least one of the conditions 3 4||Immediately before the point when the CIV ceases to meet at least one of the conditions 5||As the value is paid to the investors, or if earlier three years from the deemed disposal or when the fund is wound up 6|
|Making payment of value not taxable in the UK||The exemption continues||Immediately before the point the payment is made, and the reacquisition is immediately after||As the value is paid to the investors, with the balance at winding up|
|Election is revoked by HMRC or the CIV||When notice is given||Immediately before the exemption ceases||At the point the deemed disposal arises|
within that time.
Where the CIV anticipates meeting the condition again within nine months, the exemption is maintained for that period providing the condition is met again ↩
The exemption is maintained where the CIV manager is actively in the process of winding up the fund. ↩
Where the CIV anticipates meeting the condition again within 30 days, there is no deemed disposal. ↩
The 3 year countdown is turned off where the fund meets the conditions again within nine months of the breach. ↩