CG73999D - UK property rich collective investment vehicles: Exemption election: Ceasing to have effect
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Revocation of exemption election
Ceasing to meet the applicable exemption conditions
Temporary period when applicable exemption conditions not met for up to 30 days
Rebasing on exemption election ceasing to have effect
Where a CIV ceases to meet any of the applicable conditions, or an election is revoked by either the fund or HMRC, the election ceases to have effect. A deemed disposal and reacquisition of the interests of the investors (including those that are UK resident) will generally be triggered but see below for an exception, and CG73999G regarding the timing and effect of a deemed disposal.
Revocation of exemption election
Revocation by manager of a CIV - - TCGA92/SCH5AAA/PARA18(3)
The manager of a CIV may revoke a paragraph 12 election by written notice to HMRC. A notice must state the day from which the election is to cease to have effect. The paragraph 12 election will cease to have effect for disposals made on or after that date. A notice may have retrospective effect with HMRC consent, and guidance may be published in future setting out the circumstances in which that consent will apply based on reviews of the circumstances in any such revocation requests.
Revocation by HMRC - TCGA92/SCH5AAA/PARA15(5) and PARA18
A designated officer of HMRC may revoke the election for exemption if –
- there is a breach of the reporting requirements (TCGA92/SCH5AAA/para15(5) - see IFM19630 for further details); or
- a designated officer of HMRC considers it appropriate to do so in order to protect the public revenue.
This revocation must be given in writing to the manager of the CIV in question and specify the day from which the election is to cease to have effect and state the grounds for revoking the election. There is an appeal process, as set out in TCGA92/SCH5AAA/para19 – an appeal notice must be sent to the designated officer within 30 days from the day on which the notice of revocation is given.
The designated officers of Revenue and Customs are:
- a Director with policy responsibility for the taxation of collective investment vehicles, and
- any Deputy Directors under the line management of that Director.
Protect the public revenue
In general, HMRC expect that the use of the power in regulation 18 to revoke an election to protect the public revenue will only be used in exceptional circumstances. The gateway tests into the exemption election should ensure that only genuine commercial investment arrangements are within the regime.
HMRC will not revoke an election except in response to a set of arrangements undertaken by the CIV or its investors where tax avoidance is the main object, or one of the main objects, of those arrangements. Arrangements will not be considered to have such an object where they can reasonably be regarded as consistent with the principles on which the provisions in Schedule 5AAA are based.
Effect of revocation
Where an election is revoked, a deemed disposal and reacquisition of all the investors’ interests in the CIV will occur immediately before the revocation. Tax on any gain so arising is immediately brought into charge; see CG73999G for further details.
Ceasing to meet the applicable exemption conditions
Where an election has been made in respect of a qualifying fund or company (‘Q’) and Q ceases to meet the applicable exemption conditions at TCGA92/SCH5AAA/para 12(2) and (3) respectively, the election ceases to have effect from that time (TCGA92/SCH5AAA/para 20(2)). Examples of ceasing to meet the applicable exemption conditions include ceasing to be UK property rich, becoming a close company, or failing to meet the UK tax condition. For further details of the applicable exemption conditions see CG73998V.
Where this is the case, TCGA92/SCH5AAA/para 22 provides that there is a deemed disposal and reacquisition of all investors’ (including UK residents) interests in the CIV or company in question; see CG73999G for further details regarding such deemed disposals.
Example
The partners of a Limited Partnership Collective Investment Scheme (LP CIS) are invested in four subsidiaries, three of which are UK property rich, for which para 12(3) elections have been made. Company B, which is UK property rich, fails to meet the UK tax condition. Company B does not meet the Genuine Diversity of Ownership condition, nor is it owned by one or more qualifying partnerships. Consequently, the relevant conditions in paragraph 13(2) are no longer met. Therefore, each of the investors/partners in the LP CIS is deemed to have disposed of and reacquired their interest in company B at market value immediately before the time the company failed to meet the UK tax condition.
While ceasing to meet the exemption conditions will usually result in a deemed disposal and reacquisition of the interest in the company under paragraph 22 Sch.5AAA, this is subject to the following sections.
Temporary period when applicable exemption conditions not met for up to 30 days
Where a CIV or company fails to meet an exemption condition but expects to meet the relevant condition(s) within a 30-day period and does in fact do so, TCGA92/SCH5AAA/para 27 provides that –
- a paragraph 12 election for exemption remains valid, and
- there is no deemed disposal of investors’ interests
As a result, the failure to meet the conditions is effectively ignored and there are no consequences for the fund or its investors.
There is one exception to this; in order to protect UK taxing rights the 30-day temporary period does not apply when a CIV or company ceases to be UK property rich as required by paragraph 12(2)(c) or (3)(b).
Additionally, there can be no more than four failures to meet any of the other applicable conditions in aggregate in a rolling 12-month period - a fifth or subsequent failure will not benefit from the temporary period.
Temporary period when applicable exemption conditions not met for up to 9 months
Where paragraph 27 does not apply, TCGA92/SCH5AAA/paragraph 28 may apply instead.
Paragraph 28 provides for an election under paragraph 12 to remain valid for up to 9 months if the CIV or company fails to meet an applicable exemption condition, but the relevant fund manager expects it to meet the relevant condition(s) within that time and does in fact do so. For example, where a UK property has been sold, resulting in the fund ceasing to be UK property rich, but the manager intends to reinvest the proceeds into another UK property within the following months so that it becomes UK property rich again. If the CIV does not meet the conditions again within that time, then the exemption election is considered to have ceased to have effect at the point the CIV no longer met the first applicable exemption condition.
As a result, the failure to meet the conditions (if remedied within the 9-month period) has no effect on the fund’s exemption, but there is a consequence for investors as they are treated as making a deemed disposal under paragraph 22.
The rules in paragraph 27 (30-day temporary period) differ from those in paragraph 28 (9-month temporary period) in the following respects –
- Paragraph 27 does not apply where the CIV or company in question ceases to be UK property rich; where it does apply there is no deemed disposal and reacquisition for the investors.
- Paragraph 28 does result in a deemed disposal under paragraph 22, but the exemption election continues to have effect during the 9-month temporary period (even if the CIV or company in question ceases to be UK property rich); paragraph 28 will not apply where paragraph 27 does apply.
Manager winding up relevant fund
TCGA92/SCH5AAA/para 30 maintains exemption under a paragraph 12 election where an exemption condition is no longer met in respect of a qualifying fund or a qualifying company (‘Q’) if the fund manager is actively taking steps to dispose of the assets of the fund so that it can be wound up.
Where an election has been made under para 12(3) (and so is made in respect of a qualifying company), it is the “parent” fund itself (i.e. LP, CoACS or if applicable, deemed partnership under para 8) that must be wound up and the relevant fund manager is the manager of that fund.
Paragraph 30 ensures the exemption election continues to have effect for Q in respect of any disposals in the course of the fund being wound up. However, the investors in Q will be deemed to dispose of and reacquire their interests at the time that the exemption condition is not met. See CG73999G for more information on deemed disposals and for time the CGT will accrue to the investor.
Rebasing on exemption election ceasing to have effect
Where an election under paragraph 12 ceases to have effect other than as a result of a revocation notice being issued by HMRC under TCGA92/SCH5AAA/para15(5)(a) or 18(1) (see CG73999D), TCGA92/SCH5AAA/para 32 provides for a proportionate, market value re-basing of qualifying UK land assets of the qualifying fund or qualifying company (‘Q’). This ensures that the value of the exemption from tax on gains on UK land is preserved within the relevant fund structure, as without rebasing the value of the UK land assets held by the fund could be discounted to reflect tax on the unrealised gains.
In order for rebasing to apply, the election under paragraph 12 must have had effect for a continuous period of at least five year.
Rebasing similarly applies where the fund manager is taking steps to wind up a fund so that an exemption condition is not met but exemption nonetheless continues as a result of TCGA92/SCH5AAA/para 30.
Rebasing is applied by deeming Q to have disposed of and reacquired at market value every asset the disposal of which would have been a direct or indirect disposal of UK land and covered by the exemption election. The disposal is deemed to occur immediately before the election ceased to have effect or the fund manager started to take steps to wind the fund up.
Rebasing also applies at the level of a company in the ownership chain of Q where that company has been covered by the paragraph 12 election for at least 12 months (for example, a company holding a UK property asset, where that company is owned by Q).
Rebasing is proportionate to the level of interest held in the relevant asset by Q.