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HMRC internal manual

Savings and Investment Manual

Collective investment schemes: unauthorised unit trusts: pension funds pooling schemes: taxation of the investor

Capital Gains Tax

Pension funds pooling schemes (PFPS) are not treated as unit trust schemes for CapitalGains Tax purposes. This means that it is the participants who are chargeable to capitalgains tax in respect of their proportion of any gains that may arise within in the scheme.As investors in PFPS are registered pension schemes or their overseas equivalents it isunlikely that any Capital Gains Tax liability will arise.

Capital allowances

Participants in a pension funds pooling scheme (PFPS) are treated as lessors who haveinvested directly in any property and plant and machinery held by the PFPS. Participantsare entitled to a share of any capital allowances (and balancing adjustments) that may bedue in respect of any capital expenditure. The certificate issued to participants willshow the amounts of any allowances or adjustments that may be due.

There are, however, special rules for a PFPS that invests in assets for which capitalallowances are, or may be, made.

The special rules apply for a ‘relevant period’. A ‘relevant period’ starts whenthe PFPS first incurs expenditure qualifying for capital allowances, and ends when thePFPS has disposed of all the interests in respect of which such expenditure has beenincurred.

During a ‘relevant period’ the PFPS is subject to the following special rules.

  • There is a freeze on membership of the PFPS in the sense that a new participant will only be admitted if it acquires the whole interests in the PFPS of an outgoing participant, that is, it becomes the ‘successor’ of the former participant.
  • Every participant’s share of the scheme property remains constant until one of the participants is expelled, or withdraws, from the PFPS without being replaced by an incoming participant.
  • Where one of the participants is expelled, or withdraws, from the PFPS without being replaced by an incoming participant, the shares of the scheme property of the remaining participants are recalculated on the basis which preserves the respective ratios.
  • Part disposals of participants’ rights and interests in the PFPS are only permitted where part of the scheme property is disposed of and the trustee makes a distribution generally to the participants.
  • The participants may make further contributions to the scheme property but only on a pro rata basis determined by the respective sizes of their shares of the scheme property. Clearly, in order for the constant share rule to be satisfied, such contributions will have to be made simultaneously by all the participants.