CG73996R - UK property rich collective investment vehicles: Key definitions and terms: Meaning of a ‘collective investment vehicle being UK property rich’

Whether a CIV or, for the purposes of Schedule 5AAA, a company, is UK property rich (TCGA92/SCH5AAA/para 3) at a given time is determined by applying the rules in Part 2 of Schedule 1A to TCGA 92 and, other than partnerships, deeming non-corporate CIVs to be companies for this purpose (see CG73997D), and any disposal of an investor’s interest as if it were be a disposal of a right or interest in that company.

If a disposal were made of such a right or interest at a particular time and such a disposal would be regarded as a disposal of a UK property rich asset (that is, one deriving 75% or more of its value from interests in UK land) then the CIV is UK property rich at that time.

This is also a key concept affecting whether an offshore CIV can make an election for transparency (TCGA92/SCH5AAA/para 8(1)(a)) – see CG73997P, or exemption (TCGA92/SCH5AAA/para 12(2)(c)) – see CG73998J, and the tax treatment of its non-resident investors.

Changes taking effect from 10 April 2020

Regulation 4 of the UK Property Rich Collective Investment Vehicles (Amendment of the Taxation of Chargeable Gains Act 1992) Regulations 2020 made changes to how paragraph 3(1) and 3(4) apply in determining whether a CIV or company is UK property rich, with effect from 10 April 2020.

Prior to that date, the rules for establishing whether the conditions that must be met in order for a chargeable disposal to have occurred in accordance with Schedule 1A to TCGA 1992 were subject to paragraphs 5 and 6 of Schedule 1A. Those paragraphs provide exceptions to treating a company as UK property rich where, broadly, the UK property is used in a trade, or is disposed of as part of a series of linked transactions that, if made by a hypothetical single holding company, would not be subject to tax.

The interaction of the rules in paragraphs 5 and 6 of Schedule 1A, and paragraph 3 of Schedule 5AAA, meant that there could have been scenarios where a CIV that was clearly UK property rich on any objective measure could nonetheless be determined not to be, because of the availability of an exception within Schedule 1A to an interest being UK property rich. Furthermore, those exceptions could apply at some points within the life of an entity but not others, which could result in difficulties in monitoring the position.

A consequence of a CIV being determined not to be UK property rich because of the exceptions in paragraphs 5 and 6 is that it would not be able to make an election for transparency under paragraph 8 of Schedule 5AAA, or for exemption under paragraph 12 of that schedule, where it would otherwise qualify to do so.

The changes taking effect from 10 April 2020 provide that no account is to be taken of paragraphs 5 and 6 of Schedule 1A when considering the test for UK property richness in paragraph 3 of Schedule 5AAA. The changes do not apply retrospectively to periods prior to 10 April 2020 because, taken together with the changes made by regulation 14 (see below), they potentially have a taxing effect as investors with a less than 25% interest in CIVs that are now to be regarded as UK property rich will be within the charge to tax on gains on relevant disposals. However, such CIVs will (where eligible) be able to make a transparency or exemption election so that there is no tax on gains at CIV level – see CG73997V regarding amendments to the deadline for making a transparency election, and CG73998Y for rules regarding the deadline for making an exemption election.

Regulation 14 of the 2020 Regulations inserted new paragraph 33A into Schedule 5AAA. That paragraph provides that investors making disposals of interests in qualifying funds, or qualifying companies, in respect of which an exemption election has been made, will not be entitled to benefit from the exceptions in paragraphs 5 or 6 of Schedule 1A. This ensures that tax is paid by non-exempt investors when they dispose of interests in a CIV or company that does not itself pay tax on its gains, as was intended. This change also takes effect from 10 April 2020.