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HMRC internal manual

Investment Funds Manual

Offshore Funds: deduction of offshore income gains in computing capital gains: rollover relief (S162 TCGA 1992)

Regulation 46 of SI 2009/3001

IFM13540 explains that any gains on interests in offshore funds which form part of the assets on the transfer of a business and which would usually be subject to relief under section 162 of TCGA 1992 (roll-over relief) cannot be subject to that relief, and an offshore income gain is charged in respect of any ‘basic gain’ arising on those interests at that time.

On such a transfer, the transferor will receive shares in the transferee company. If the transferor subsequently disposes of part or all those shares, then section 162(4) TCGA provides a formula that reduces the acquisition cost of those shares (the ‘new assets’) disposed of (for further details see the Capital Gains Manual. It usually works as follows.

The proportion of aggregate net gains attributable to the consideration received in the form of shares is deducted from the allowable acquisition costs of those shares (i.e. the ‘new asset’). The charge on those gains is thus deferred until the shares are disposed of. Section 162(4) gives instructions for computing the amount attributable to the consideration in shares. It states that the fraction A/B has to be applied to the aggregate net gains, where:

  • `A’ is the cost of the shares; and
  • `B’ is the value of the whole consideration received by the transferor in exchange for the business.

But where the transfer gave rise to an offshore income gain (because the assets transferred included interests in offshore funds), then “B” is to be taken to be what it would be if the value of the consideration, other than shares so received by the transferor, were reduced by an amount equal to the offshore income gain.