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HMRC internal manual

Offshore Funds Manual

Investors in non-reporting funds: disposals of interests: schemes of reconstruction - regulation 36

Regulation 36 prevents section 136 TCGA (scheme of reconstruction involving issue of securities treated as an exchange, not a disposal) from applying in any case where an interest in a non-reporting fund is exchanged for an interest in an entity that is not a non-reporting fund.

Where such an exchange of interests takes place, and regulation 36(1) means that section 136 TCGA does not apply, then regulation 36(2) determines that the exchange will be treated as a disposal of the interests in the non-reporting fund.

The disposal is deemed to have taken place at market value (at the time of the exchange) for the purposes of calculating the offshore income gain arising to the person disposing (or deemed to dispose) of their interest.

While regulation 36 applies in circumstances where an interest in a non-reporting fund is exchanged for an interest in an entity that is not such a fund it should be noted that this regulation applies for the purpose of offshore income gains only and that no capital gain can arise solely as a result of an event to which this regulation applies. If an investor switches from an interest in a non-reporting fund to a reporting fund at a loss there will be a disposal at capital loss

However where such an exchange does lead to an amount being charged to tax as an offshore income gain then the acquisition cost on which any later capital gain or loss is based is the deemed disposal consideration.

Protected Rights under regulation 30

If the holding which is exchanged includes an element of ‘protected rights’ under regulation 30 then no charge to tax on an offshore income gain will apply to that element of the holding and there will be no deemed disposal of that element of the holding.