Particular arrangements: share buy-backs and share issuance
The price or value of shares in fixed share capital companies may reflect either a discount or a premium to the net asset value of the underlying assets. It may also be the case in some circumstances that there is either directors’ or investors’ discretion to allow or require the buy-back of shares if there is a discount of a certain level between the net asset value of the arrangements and the share price.
Provided the share buy-back arrangements are made to prevent the discount becoming too large by reference to net asset value, and provided a reasonable investor cannot expect to realise their investment either entirely or almost entirely by reference to net asset value (or by reference to an index), and there is no determinable termination date, then such arrangements will be outside the definition of an offshore fund for UK tax purposes (as Condition C at TIOPA2010/S356 will not be satisfied). Similar considerations apply where the shares trade at a premium.
For example, if a foreign equivalent of an investment trust was trading at a discount of 15% to NAV and bought its own shares on the open market to reduce the discount then, absent any factors that could lead to an investor being able to expect to redeem their investment at or close to NAV, this would not cause Condition C at TIOPA2010/S356(6) to be satisfied: it is clear that before the company commenced to buy its own shares that some investors would not have been able to redeem their interest at NAV and that any subsequent reduction in the discount would be due to normal operation of the market. Without any factors indicating that the company would act to reduce the discount either having been in place prior to this market activity or at some point in the future, a reasonable investor could not expect to realise their investment at or close to NAV.
However, share buy-back arrangements that are specifically designed to provide tracking to net asset value will cause the company or share class to come within the definition of offshore fund. This would include any arrangements introduced as a result of changes to the constitution of a scheme. If a change in the terms of a scheme result in it coming within the definition of an offshore fund then UK investors are treated as if they had always held an interest in an offshore fund. If the fund becomes a reporting fund then investors may be able to make an election under regulation 48(2) to crystallise any offshore income gain at that point, with any subsequent gain being subject to chargeable gains treatment (provided the fund remains a reporting fund). See OFM15200 and OFM19000 for further guidance.
When considering an investor’s rights, account should be taken of all scheme documents, promotional documentation or communications to determine what guarantees or undertakings may have been given to the investor.
An undertaking or guarantee, etc, to buy back or redeem only a part of an investor’s holding entirely or almost entirely by reference to the net asset value of the property or an index of any description can still constitute an expectation, so for example if the fund manager undertook to redeem or buy back an investor’s shares in tranches the arrangements could still be within the definition.
Warrants or options that give an investor the right to sell shares back to an issuer for a particular price will not cause Condition C to be satisfied unless the price is determined by reference to NAV so that the investment can be realised at or close to NAV. Similarly, rights that carry the option to convert to other classes of interest would only satisfy Condition C if the new rights themselves permitted an investor to realise their investment at or close to NAV.