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HMRC internal manual

Life Assurance Manual

Calculation of ‘I’ income and chargeable gains: Collective investment schemes annual deemed disposal – categories of funds: TCGA92/S212

This manual has yet to be updated to reflect the charge to corporation tax arising from the disposal by non-residents of interests in UK land.

An understanding of the different kinds of funds and what they are trying to achieve for investors is helpful in understanding the relevant tax treatment. Brief summaries of the main fund types follow with cross references to more detailed explanations in the relevant specialist manuals.

Collective investment schemes (CISs)

These enable investors to pool their assets and invest in a professionally managed portfolio of investments, with a broader spread of risk than would usually be possible from private investment. The tax rules that apply to UK CISs and their investors aim to avoid double taxation of income or capital gains, and to tax investors in a similar way to that applying to direct investors in the underlying assets. UK-resident CISs are generally exempt from tax on capital gains; investors within the charge to tax are liable to tax on any gain arising on a disposal of their shares or units in the fund.

Authorised Unit Trusts (AUTs) and Open Ended Investment Companies (OEICs)

AUTs and OEICs are Authorised Investment Funds (AIFs) Regulation 3 of SI 2006/964. An AIF is not subject to tax on its chargeable gains TCGA92/S100. Participants, including life companies, within the charge to Corporation Tax are liable to tax on gains made on the disposal of interests in AIFs.

Units of AUTs are treated as shares for capital gains purposes TCGA92/S99. When calculating the chargeable gains and allowable losses for a life company’s holding in an AIF referable to BLAGAB the following rules need to be considered:

  • the general share capital gains rules with  TCGA92/PART IV (CG50200C);

  • the share pooling rules FA12/S119-120 (LAM03230);

  • the bed and breakfasting rules at TCGA92/S105(1) (LAM03710); and

  • the specific collective investment schemes capital gain rules within TCGA92/PARTIII/ CHAPTER3-4  (CG57680P)

Offshore funds

An offshore fund is a defined category of mutual fund resident in, or based in, a territory outside the United Kingdom. Investors in offshore funds who are within charge to UK tax and who have invested in an offshore fund are liable to tax on income and gains IFM12100. Life companies may have some investments in structures in overseas jurisdictions that do not fit neatly into the various categories of mutual fund, see [This manual has yet to be updated to reflect the charge to corporation tax arising from the disposal by non-residents of interests in UK land.

An understanding of the different kinds of funds and what they are trying to achieve for investors is helpful in understanding the relevant tax treatment. Brief summaries of the main fund types follow with cross references to more detailed explanations in the relevant specialist manuals.

Collective investment schemes (CISs)

These enable investors to pool their assets and invest in a professionally managed portfolio of investments, with a broader spread of risk than would usually be possible from private investment. The tax rules that apply to UK CISs and their investors aim to avoid double taxation of income or capital gains, and to tax investors in a similar way to that applying to direct investors in the underlying assets. UK-resident CISs are generally exempt from tax on capital gains; investors within the charge to tax are liable to tax on any gain arising on a disposal of their shares or units in the fund.

Authorised Unit Trusts (AUTs) and Open Ended Investment Companies (OEICs)

AUTs and OEICs are Authorised Investment Funds (AIFs) Regulation 3 of SI 2006/964. An AIF is not subject to tax on its chargeable gains TCGA92/S100. Participants, including life companies, within the charge to Corporation Tax are liable to tax on gains made on the disposal of interests in AIFs.

Units of AUTs are treated as shares for capital gains purposes TCGA92/S99. When calculating the chargeable gains and allowable losses for a life company’s holding in an AIF referable to BLAGAB the following rules need to be considered:

  • the general share capital gains rules with  TCGA92/PART IV (CG50200C);

  • the share pooling rules FA12/S119-120 (LAM03230);

  • the bed and breakfasting rules at TCGA92/S105(1) (LAM03710); and

  • the specific collective investment schemes capital gain rules within TCGA92/PARTIII/ CHAPTER3-4  (CG57680P)

Offshore funds

An offshore fund is a defined category of mutual fund resident in, or based in, a territory outside the United Kingdom. Investors in offshore funds who are within charge to UK tax and who have invested in an offshore fund are liable to tax on income and gains IFM12100. Life companies may have some investments in structures in overseas jurisdictions that do not fit neatly into the various categories of mutual fund, see](https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm12210) for further advice.

Co-ownership Authorised Contractual Schemes (CoACS) IFM08300

A Co-ownership Authorised Contractual Scheme (CoACS) is a UK collective investment scheme which is constituted on a contractual basis and is transparent for the purposes of tax on income. A CoACS is a pool of assets held and managed on behalf of a number of investors who are the co-owners of the assets.

A CoACS is not itself within charge to direct taxes. However, for a CoACS, TCGA92/S103D disregards the investors’ share of the underlying assets held by the CoACS and treats investors’ units in the CoACS as a single chargeable asset.

TCGA92/S103D/103DA sets out the rules for life companies to be used when calculating the chargeable gains/ allowable loss arising from the annual deemed disposal of an interest in a Co-ACS. The rules also apply to actual disposals.

Real Estate Investment Trust (REIT) IFM21000

A REIT is a vehicle that allows an investor to obtain broadly similar returns from their investment, as they would have, had they invested directly in property. The vehicle is a limited company ‘UK-REIT’ (or a group of such companies ‘Group REIT’) required to invest mainly in property and to pay out 90% of the profits from its property rental business to shareholders.

A UK-REIT is exempt from tax on profits on its property rental business, including income and chargeable gains on direct disposal of property. The Investment Funds Manual contains further details.

There are two specific life tax rules which aim to prevent life companies using REITs to defer tax on gains:

  • inclusion of REITS in the definition of assets subject to a deemed disposal under TCGA/S212

  • prohibition on life companies (or any 75% subsidiaries) from being a member of a Group REIT (CTA10/S606(2)(b),(c))

Permanent Establishment

TCGA92/S212 applies to an overseas life insurance company in relation to their UK assets. Assets (whether situated in the United Kingdom or elsewhere) are UK assets if they are attributed to the permanent establishment in the United Kingdom through which the company carries on life insurance business.

Interaction with controlled foreign company (CFC) charge

As life companies may have significant holdings in offshore funds and collectives, these may trigger a CFC charge. Where TCGA92/S212 applies this could result in double taxation. Regulations in SI2012/3044 prevent this double charge arising LAM12100.