IFM40375 - Becoming a QAHC: moving assets out of the ring fence

FA22/SCH2/PARA22

PARA 22(4) to (6) mirror the provisions of PARA 22(1) to (3) in relation to assets that, due to a change in use or status or otherwise, move from inside to outside the QAHC ring fence business.

In particular, PARA 22(4) provides that PARA 22(5) applies when any of the following assets leave the QAHC ring fence business:

  • Overseas land;
  • A loan relationship which the QAHC is party to for the purposes of an overseas property business, to the extent that, when apportioned on a just and reasonable basis, the loan relationship or contract is attributable to those purposes, and the profits arising from that relationship or contract are exempt by virtue of the QAHC overseas property exemption rules in PARA 52(4);
  • Anything that was a qualifying share when it was held within the QAHC ring fence business.

This could happen, for example, if an investee company of the QAHC becomes UK property rich.

In relation to any asset that falls within PARA 22(4), PARA 22(5) imposes a deemed disposal and re-acquisition of the asset for corporation tax purposes.

The disposal is deemed to take place immediately before the asset left the QAHC ring fence business.

The reacquisition is deemed to take place immediately after the asset has left the QAHC ring fence business.

Both the deemed sale and deemed re-acquisition are treated as having taken place at market value, per PARA 22(7).

PARA 22(6) provides that any chargeable gain or allowable loss arising under PARA 22(5) arises inside the QAHC ring fence business – and so the PARA 53 rules would apply.

PARA 22(8) provides that any reference to deemed disposals and reacquisitions within TCGA92/SCH7AC/PARA 11 does not include any deemed sale and reacquisition under PARA 22(2) or PARA 22(5). This ensures that any deemed disposal and reacquisition under PARA 22 is ignored for the purposes of the substantial shareholding exemption rules in TCGA92/SCH7AC/PARA 11 - so that these QAHC ring fence deemed transactions do not trigger a break in ownership of shares or interests in shares for the purposes of the substantial shareholding exemption rules.

Example

A QAHC holds shares in an investee company. Those shares are qualifying shares within the definition in FA22/SCH2/PARA53 and therefore held inside the QAHC ring fence business.

The investee company then changes the nature of its own business activity, and in particular makes a substantial investment in UK property. As a result, more than 75 percent of the value of the investee company is now derived from UK land.

As the shares held by the QAHC now derive more than 75 percent of their value from UK land, they are no longer qualifying shares – these shares will now be held outside the QAHC ring fence business.

As the shares held by the QAHC fall within PARA 22(4) - having previously been qualifying shares held within the QAHC ring fence business – the deemed disposal and acquisition rule in PARA 22(5) applies.

The deemed disposal and reacquisition are both treated as having taken place at market value by virtue of PARA 22(7).

Although PARA 22(6) provides that any chargeable gain or allowable loss under PARA 22(5) arises inside the QAHC ring fence business, in this case, the deemed disposal is of qualifying shares. As PARA 53 provides that any gain in relation to a disposal of qualifying shares is not a chargeable gain, neither a chargeable gain nor an allowable loss will arise in respect of this deemed disposal.