CG73999G - UK property rich collective investment vehicles: Exemption election: Deemed disposals TCGA92/SCH5AAA/paras 21 to 24
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Deemed disposals: events causing a deemed disposal
Deemed disposal: calculation of the gain or loss on a deemed disposal and reacquisition
Deemed disposal: time at which gains accrue
Deemed disposal: notification to investors on the event of a deemed disposal
When a paragraph 12 election ceases to have effect as a result of TCGA92/SCH5AAA/para 20 because the exemption conditions are no longer met, or the election is revoked, there is a deemed disposal and reacquisition at market value of all of the investors’ interests in the qualifying fund (CIV) or qualifying company. The deemed disposal and reacquisition arise immediately before the point the election ceases to have effect. This is subject to one possible exception, in respect of a failure to meet certain conditions for temporary periods lasting no longer than 30 days, see CG73999D for details.
A deemed disposal will also arise under TCGA92/SCH5AAA/para 21 where certain returns of value are made to investors and the amount in question is of a revenue nature; see below for further details.
Any tax due as a result of a deemed disposal of an interest in a qualifying fund or a qualifying company is generally not due until funds are paid to the investor in respect of their interest in the fund or a period of three years elapses from the deemed disposal, other than in a case of revocation of the election; see below for further details.
Deemed disposals: events causing a deemed disposal
Ceasing to be UK property rich
If a qualifying fund or qualifying company ceases to be UK property rich, the deemed disposal of investors’ interests occurs immediately before that point (but see CG73999D for details where the fund or company itself may nonetheless continue to be exempt in respect of its disposals of UK land where it is not UK property rich for temporary periods lasting no longer than 9 months).
The fund or company ceases to be UK property rich as a question of fact, rather than at the point when it becomes aware that it is no longer UK property rich. HMRC would expect entities that have made a paragraph 12 election for exemption to regularly value their assets so that they know within a reasonable timeframe if they are no longer UK property rich. HMRC will accept for this purpose that quarterly appraisals would be sufficient (that is, taking a view of the market and making reasonable adjustments to the previous formal valuation), supplemented with periodic formal valuations as provided for in the fund’s documentation. If a qualifying fund or company ceases to be UK property rich between valuations, the value of the assets should be the amount per the previous quarterly valuation.
See the table below regarding the time when gains are treated as accruing.
Payments not otherwise taxable
An election under TCGA92/SCH5AAA/PARA12 has the effect of exempting gains on direct and indirect disposals of UK land within a fund structure. Without specific provisions, value arising from realisation of UK land assets within an exempt fund could be returned to non-resident investors in a form that would not be subject to UK tax (for example, a dividend distribution) but that would reduce any gain on a subsequent disposal by those investors, with a consequent potential loss of tax to the UK Exchequer.
For example, if a corporate fund made a distribution to its investors that represented value deriving from gains on UK land and that payment was of a revenue nature it would not give rise to a charge under TCGA92/SCH1A and the value of those gains would also no longer be represented in the value of the interest held by the investors in the fund when they subsequently made a disposal of the whole or part of that interest.
TCGA92/SCH5AA/PARA21 therefore provides that where certain returns of value are made to investors in an elected exempt CIV or company and the amount in question is of an untaxed revenue nature, there is a deemed market value disposal and reacquisition of investors’ interests. Non-resident investors will potentially be within charge to tax on any gain arising on such a deemed disposal. This prevents gains from UK land escaping UK tax entirely, at both fund and investor level.
The deemed disposal occurs immediately before the payment is made and reacquisition immediately after, but only arises for investors who would be subject to tax on that distribution.
The UK Property Rich Collective Investment Vehicles (Amendment of the Taxation of Chargeable Gains Act 1992) Regulations of 2020 and 2021 made amendments to clarify that a deemed disposal will not be treated as arising where the value in question has already been taxed on another person. In practical terms that person would be the CIV or company invested in, which despite being the subject of an exemption election may nonetheless be charged to tax where disposals of UK land are taxed as income instead of being treated as exempt gains (for example, where a disposal is subject to the transaction in land (TiL) rules).
The 2021 regulations also make provision for cases where the underlying value is only partly charged to tax as income (for example, as might sometimes be the case under the TiL rules), by providing for a just and reasonable reduction of the market value on a deemed disposal for investors so that any gain is reduced. Where such a reduction is to be made, the regulations amend paragraph 23 of Schedule 5AAA to provide a similar just and reasonable reduction to the sum treated as received by investors for the purposes of determining how much tax is immediately brought into charge on a deemed disposal (part of the tax due on a relevant gain is in some circumstances deferred until a later time). These changes are relieving and have effect from 6 April 2019.
‘Value’ in this context may derive from a direct or an indirect disposal of UK land. Where that value may be attributable to more than one disposal, it is necessary to consider where the value is actually generated. So, for example, Company A in a fund structure makes a direct disposal of a UK property with part or the whole of the proceeds being charged to tax as income; Company B redeems part of its interest in Company A (an indirect disposal) in order to return proceeds of the disposal to its parent, Fund X, which in turn distributes those proceeds to its investors by way of a dividend – the ‘value’ in question is generated by the initial direct disposal, and is not added to by the indirect disposal as that is merely a mechanism to channel the proceeds of the direct disposal to X’s investors. See the table below regarding the time when gains are treated as accruing.
Deemed disposal: calculation of the gain or loss on a deemed disposal and reacquisition
The basis of the gains or losses arising on a deemed disposal will be the market value of the interest at the time of the deemed disposal.
For the purposes of calculating the gain or loss arising on a deemed disposal, no account is taken of any later changes to the value of an investor’s interest in the relevant fund or company after the point it loses its exempt status. So, if there is a deemed disposal any gain or loss is calculated at that time and cannot be adjusted to reflect any future change in value of an investor’s interest in the fund.
TCGA92/SCH5AA/para24 does however provide for relief for any costs that could reasonably be expected to have been incurred in the event of an actual rather than a deemed disposal. This will be relevant where, for example, a fund ceases to be UK property rich because the manager is disposing of assets as part of a process of winding up the fund; any gain or loss will include realised and unrealised gains on the underlying assets of the fund and in such circumstances relief is available under TCGA92/S38(1)(c) in respect of anticipated costs of disposing of the remaining assets. See CG15150 for general guidance on items of expenditure that can be deducted in calculating a gain or loss.
Deemed disposal: time at which gains accrue
In some circumstances, a gain on a deemed disposal is brought into charge immediately. A gain realised on an actual disposal will always be treated as accruing at the time of the actual disposal. In other cases, TCGA92/SCH5AA/para23 provides for gains on deemed disposals to be deferred and brought into charge at some time later. The table below summarises the position. For comment on when notifications to investors are required – see below.
| Occasion of deemed disposal | Time gain treated as accruing |
|---|---|
| 1. Paragraph 21: Payments of a revenue nature not otherwise taxable | The appropriate portion of the deemed gain, as provided for by paragraph 23, is treated as accruing to the person at the time of an actual disposal or otherwise the time of the receipt. Any balance of gains remaining is brought into charge in accordance with paragraph 23 |
| 2. Paragraph 22: Para 12 exemption election ceases to have effect – revocation of election under para 15 or 18 | Immediately prior to the para 12 election ceasing to have effect |
| 3. Paragraph 22: Para 12 exemption election ceases to have effect – ceasing to meet applicable exemption conditions | When the fund winds up or, if sooner –on an actual disposal, orthree years after the deemed disposal |
In the case of (3) above, where a qualifying fund or company ceases to meet the applicable exemption conditions for a temporary period of up to 9 months so that –
- paragraph 28 applies (see CG73999D) but
- a deemed disposal nonetheless arises
and the fund or company then meets the applicable exemption conditions within the 9-month period, the 3-year period is switched off and any deemed gain will only be chargeable when an investor receives funds from the CIV, makes an actual disposal or at the point the fund is wound up. If the CIV again ceases to meet the condition, there is another deemed disposal and reacquisition, and the rules above apply again.
As there may be a number of deemed and actual disposals depending on the circumstances, paragraph 23 contains rules to ensure gains charged cannot exceed the overall total gains. If some of the deemed gain has accrued on one or more previous occasions, the appropriate portion is restricted so that, when added to the appropriate portion or portions on the previous occasion or occasions, it does not exceed 100%.
Deemed disposal: notification to investors on the event of a deemed disposal
TCGA92/SCH5AAA/para25 provides that in certain cases the manager of a relevant fund must notify the investors that a deemed disposal and reacquisition has occurred. This is because investors may not be aware of the event giving rise to the deemed disposal. A notification must be made within 30 days of the event leading to the deemed disposal.
Paragraph 25 specifies that notifications must be sent in the following cases (see guidance above for further details regarding these deemed disposal events) -
- Where there is a deemed disposal under TCGA92/SCH5AA/para21 (returns to investors of value derived from disposal of UK land). In such cases, the fund manager is very unlikely to know how each investor is impacted by the rules in paragraph 21 because that will be dependent on each investor’s own tax status. The fund manager, however, must notify all investors to ensure that they are aware there may be a capital gains liability and can accordingly assess their own positions.
- Where there is a deemed disposal under TCGA92/SCH5AA/para22 where either the fund manager or HMRC has revoked a paragraph 12 exemption election.
- Where the balance of a deferred gain has come into charge at the end of a 3-year period or because the fund has wound up.
Given that the deemed disposal will in some cases mean that the investors are immediately liable to pay tax on the gain, and in some cases the gain will accrue at a later date, whilst there is no legal requirement to do so the fund manager may wish to supplement the notification to provide further helpful information for its investors.
In the case of a deemed disposal and reacquisition, under these provisions, generally investors in the CIV who are required to make a return and payment on account to HMRC must do so within 30 days of making a disposal of UK land. However, they will instead have 30 days from receiving notice from the fund manager (in compliance with TCGA92/SCH5AAA/paragraph 25) of the deemed disposal to make a report and payment. (FA19/SCH2/para 12).
Where the fund manager does not comply with their legal obligation to notify investors under paragraph 25, HMRC may issue a penalty not exceeding £3,000 (TCGA92/SCH5AA/para26). Where there is more than one fund manager, the aggregate penalty will not exceed £3,000. HMRC must assess the penalty and notify the manager within a period of 12 months from the date HMRC become aware of that failure. The fund manager can appeal the penalty (see TCGA/SCH5AAA/para 26 for further information).