The Collective Investment Schemes (Tax Transparent Funds, Exchanges, Mergers and Schemes of Reconstruction) Regulations 2013

EXPLANATORY NOTE

(This note is not part of the Regulations)

These Regulations make provision in relation to the capital gains tax treatment of investors (“participants”) in collective investment schemes. The provisions made fall into 3 categories-

provisions in relation to tax transparent funds (regulations 3 to 7 and 15),

provisions in relation to exchanges, mergers and schemes of reconstruction of collective investment schemes (regulations 8 to 13), and

consequential amendments to secondary legislation (regulation 14).

Regulation 1 provides for citation, commencement and effect.

Regulation 2 introduces the amendments to the Taxation of Chargeable Gains Act 1992 (“TCGA”).

Regulation 3 inserts section 103D into TCGA. This makes provision in relation to a new type of collective investment scheme, an authorised contractual scheme which is a co-ownership scheme. A participant’s interests in the property subject to the scheme are disregarded for the purposes of TCGA and instead the participant’s holding of units issued under the scheme is treated as an asset for the purposes of capital gains tax.

Regulations 4 to 6 make provision in relation to holdings in collective investment schemes by insurance companies.

Regulation 4 inserts section 211B into TCGA to provide relief for insurance companies which transfer assets into a co-ownership scheme or certain offshore funds which are directly comparable to co-ownership funds in exchange for units in the scheme. No chargeable gain or allowable loss will arise on the transfer provided that the assets transferred and the units issued in exchange are held within the same category of business within the company’s long-term insurance fund.

Regulation 5 amends section 212(1) of TCGA (annual deemed disposal of holding of unit trusts etc) to add an interest in a co-ownership fund to the types of collective investment scheme in relation to which an insurance company is treated as disposing and reacquiring its interest at the end of each accounting period.

Regulation 6 amends section 213 of TCGA (spreading of gains and losses under section 212) to provide that where section 211B has applied in relation to the acquisition of units, if those units are disposed of within three years after the end of the accounting period in which the acquisition took place, any allowable loss or chargeable gain deferred by section 211B and not already treated as accruing under section 213 will be brought into account at the end of the period in which the disposal occurs. Units in relation to which section 211B has applied are treated as being disposed of before other units in the same scheme.

Regulation 7 amends section 288 of TCGA (interpretation) to insert a definition of “participant”, include new section 211B in the list of no gain/no loss provisions and insert cross-references to other definitions.

Regulation 8 amends section 99A of TCGA (authorised unit trusts: treatment of umbrella schemes) to extend the treatment provided in relation to umbrella funds to other types of collective investment scheme.

Regulation 9 omits section 102 of TCGA (collective investment schemes with property divided into separate parts) as this provision is now otiose.

Regulation 10 makes consequential amendments to section 103A of TCGA (application of Act to certain offshore funds).

Regulation 11 inserts Chapter 4 (collective investment schemes: exchanges, mergers and schemes of reconstruction) in Part 3 of TCGA. This comprises sections 103E to 103K which make provision for exchanges, mergers and schemes of reconstruction in relation to collective investment schemes.

Section 103E lists the types of collective investment scheme to which the new Chapter 4 applies and excludes the operation of Chapter 2 of Part 4 of TCGA in relation to such schemes except as applied by Chapter 4 or where one of the parties to an exchange or a scheme is not a collective investment scheme to which Chapter 4 applies.

In a case where one of the new sections applies, the share reorganisation provisions in sections 127 to 131 of TCGA will apply with necessary adaptations as if the scheme were a company and the event in question were a reorganisation of its share capital, so no disposal of the original holding is treated as occurring and the new holding is treated as the same as the original.

Section 103F makes provision about exchanges of units for other units in the same collective investment scheme in two cases: first where there is no change in the underlying property and second where all the units in the collective investment scheme, or all the units of a certain class, are exchanged.

Section 103G applies where a collective investment scheme acquires the interests in another collective investment scheme and the acquiring scheme issues units to the unit holders in the target scheme.

Section 103H applies where a collective investment scheme is involved in a scheme of reconstruction and for the purposes of or in connection with the scheme of reconstruction units are issued in the successor collective investment scheme to the unit holders in the original scheme.

Section 103I makes provision for the issue of units in another collective investment scheme in accordance with regulation 12 of the Undertakings for Collective Investment in Transferable Securities Regulations 2011 (S.I. 2011/1613) for the purposes of or in connection with a scheme of reconstruction.

Section 103J contains supplementary provisions.

Section 103K is an anti-avoidance provision. This provides that sections 103G, 103H and 103I do not apply unless the exchange or scheme of reconstruction in question is effected for bona fide commercial reasons and does not form part of a scheme or arrangements of which the main purpose, or one of the main purposes, is avoidance of liability to capital gains tax, corporation tax or income tax.

Regulation 12 inserts a definition of “offshore fund” in section 288 of TCGA.

Regulation 13 inserts Schedule 5AZA in TCGA which gives the meaning of “scheme of reconstruction” for the purposes of sections 103H and 103I. Paragraph 2 sets out the type of scheme within the Schedule and provides definitions of “original collective investment scheme” and “successor collective investment scheme”. Paragraphs 3 and 4 set out the conditions a scheme must meet in relation to issue of units and entitlement to units under the scheme. Paragraphs 5 and 6 provide that in applying these conditions a preliminary reorganisation of units in the original collective investment scheme and a subsequent issue of units in the successor collective investment scheme are disregarded.

Regulation 14 makes consequential amendments to the Authorised Investment Funds (Tax) Regulations 2006 (S.I. 2006/964).

Regulation 15 makes consequential amendments to the Offshore Funds (Tax) Regulations 2009 (S.I. 2009/3001).

A Tax Information and Impact Note covering this instrument will be published on the HMRC website at http://www.hmrc.gov.uk/thelibrary/tiin.htm.