Collectives: Exemptions: In specie redemptions
Pro Rata In-Specie Redemptions
By virtue of paragraph 7 of FA99/SCH19, no charge to Stamp Duty Reserve Tax (SDRT) arises on the surrender of a unit in a unit trust fund or a share in an Open-Ended Investment Company (OEIC), if the unit/OEIC share holder receives, in lieu of cash and by way of a distribution, a pro rata in specie share of each investment held by and within the fund that is proportionate to, or as nearly practicable proportionate to, the value of the unit/OEIC share holder’s entitlement. In this situation, the number of surrendered units or OEIC shares is omitted from a fund manager’s monthly FA99/SCH19 calculation and notice to HM Revenue & Customs (HMRC).
‘Pro rata’ is a Latin term meaning ‘in proportion to’. Similarly, ‘In Specie’ is a Latin term meaning ‘in the actual form’. Transferring property ‘ pro rata in specie’ means to transfer the ownership of that property from one person/company/entity to another person/company/entity in its current form (i.e. without the need to convert the property to cash), in proportion to the receiver’s entitlement.
In determining whether a transaction represents a pro rata in specie surrender/redemption of units/OEIC shares, in terms of practicality, this will largely be judged by reference to trading constraints beyond the control of the fund manager. In particular, the necessity to handle only deliverable lots in certain markets will be accepted as a practical constraint. It is, however, an all or nothing test in the sense that the whole value of the surrender is chargeable unless the condition is met.
While not forming part of the monthly FA99/SCH19 SDRT computation, a fund manager is, nevertheless, required to declare on a monthly basis to HMRC, the number of units or OEIC shares that relate to pro rata in specie redemptions per each charging week.
Non-Pro rata In-Specie Redemptions
Where units or OEIC shares are surrendered other than for cash, but the unit/share holder does not receive a proportionate share of each investment held within the fund, the surrender is not regarded as tax exempt under Paragraph 7 FA99/SCH19. This type of surrender or transaction is regarded as a non-pro rata in specie redemption and is subject to a charge to SDRT under FA99/SCH19/PARA2 as the beneficial interests of the holder in the fund will change as a consequence of the surrender and distribution of investments from the fund.
In this situation, the number of non-pro rata redemption units/OEIC shares surrendered is required to be included within a fund manager’s monthly computation per charging week. The number of such units/OEIC shares surrendered do not, however, benefit from the I/S SDRT reducing fraction (i.e. where the total number of units/OEIC shares surrendered (‘S’) in a ‘relevant two-week period’ exceed the number of units/OEIC shares issued (‘I’) in the same period).
While forming part of the monthly FA99/SCH19 SDRT notice computation, the tax charge arising on a non-pro rata in specie redemption can, however, be reduced to the extent that the underlying fund holds exempt investments by applying the reducing fraction N/(N+E).
Whether or not an in specie redemption is pro rata, the transfer of investments from a fund to the unit/OEIC share holder is excluded from a charge to SDRT under FA86/S87 by FA86/S90(1B).
See STSM101020 for the meaning of a unit trust.
See STSM101050 for the meaning of an open-ended investment company.
See STSM104020 for the meaning of a charging week.
See STSM103070 for the meaning of a relevant two-week period.