IFM16110 - Exchanges, Mergers, Reconstructions: Introduction

There are a number of reasons why a fund manager may want to propose a merger or reconstruction of a fund. Such a proposal is likely to require the approval of investors and an important aspect will be to minimise or eliminate any costs involved including any taxation. In particular investors will want to be assure that there will be no charge to tax on capital gains.

A reorganisation or reconstruction which results in shares being exchanged for other shares is typically treated for chargeable gains purposes as not involving a disposal or acquisition of new shares. Instead the acquisition of the new shares is treated as taking place at the same time as the existing shares. These rules are contained in sections 126 to 138A of the Taxation of Chargeable Gains Act 1992 (TCGA) – see the Capital Gains Manual from CG51700C.

Historically, these rules were in some cases difficult to apply to mergers or reconstructions involving units or shares in collective investment schemes (CIS). In 2013 new rules were introduced to deal with mergers and reconstructions of CIS. The Collective Investment Schemes (Tax Transparent Funds, Exchanges, Mergers and Schemes of Reconstruction) Regulations 2013 (SI 2013/1400) introduced a new Chapter 4 of Part 3 TCGA (“Chapter 4”) as well as a new Schedule 5AZA TCGA to define “scheme of reconstruction” (see IFM16250).

Chapter 4 applies to certain types of CIS: see IFM16120.

As a result, sections 126 to 138A TCGA only apply to arrangements involving CIS as directed by Chapter 4, although sections 135 to 138A continue to apply in the normal way where one of the funds involved in the arrangement is not a CIS: see IFM16130.