IFM16230 - Scheme of reconstruction involving issue of units

Section 103H Taxation of Chargeable Gains Act 1992 (TCGA)

This section applies where investors in CIS’A’ exchange units for new units in CIS ’B’ where ‘B’ is a successor or feeder fund to ‘A’. Two conditions must be satisfied:

  • In connection with a scheme of reconstruction, all investors in ’A’ – or all investors holding units of a particular class – enter an arrangement, and
  • Under that arrangement, units in ‘B’ are issued to those investors in proportion to their holding in ‘A’. The ‘A’ units may be retained by the investors, or they may be cancelled or otherwise extinguished.

If this section applies:

  • Investors are treated as having replaced their ‘A’ units with their holding at the conclusion of the arrangement (either ‘B’ units or a mixture of ‘A’ and ‘B’ units) and the ‘A’ units are treated as having been cancelled (even if they are actually retained).
  • Chargeable gains rules apply as if schemes ‘A’ and ‘B’ were a single company which had reorganised its share capital - see CG51700C. In summary, the exchange of units in ‘A’ for units in B’ is treated as not a disposal for chargeable gains purposes and the ‘B’ units are treated as having been acquired at the same time as the original ‘A’ units.

Where an interest in units in a non-reporting offshore fund is exchanged or treated as exchanged for an asset which is not an interest in a non-reporting offshore fund, there is a disposal of the interests in the non-reporting offshore fund for a consideration equal to their market value at the time of the exchange. See IFM13284 (corporation tax payers) and IFM13386 & IFM13388 (income tax payers).

Where a reorganisation in terms of case 2 of section 103F (see IFM16210) takes place in advance of the reconstruction, the provisions of section 103H apply to the position after the reorganisation.

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

‘Scheme of reconstruction’ and ‘feeder fund’ are defined in Schedule 5AZA to TCGA – see IFM16250.