IFM08640 - Co-ownership Authorised Contractual Schemes (CoACS): Chargeable Gains: Insurance Companies

General

There are specific chargeable gains rules for insurance companies investing in collective investment schemes including in CoACS. They concern:

  • Loss relief (clogged losses); and
  • Annual deemed disposals.

{#}Loss relief (clogged losses)

The basic rules on how a loss can be used if it arises from a disposal to a connected person are outlined at CG14561.

Section 210C of the Taxation of Chargeable Gains Act 1992 (TCGA) provides a further exception to the basic rule. Where an insurance company disposes of an interest in an Authorised Investment Fund to the manager of the fund, section 18(3) TCGA (the clogged losses rule) does not apply.

With effect from 1 January 2018 the section 210C exception also applies to a disposal of units in an authorised contractual scheme.

{#}Annual deemed disposals

Units in an authorised contractual scheme which are held in the long-term fund of an insurance company are subject to section 212 TCGA. Section 212 also applies to other UK authorised collective investment schemes and offshore funds. Under section 212 the insurance company is deemed to have disposed of and immediately reacquired the interests concerned at their market value at the end of each accounting period. Section 213 brings that gain into charge across seven accounting periods.

Anti-avoidance rules were built into section 213 to prevent any tax avoidance involving the interaction of sections 212 and 213 following the transfer of an asset to which section 211B applied (see IFM4040). Section 211B applies where an asset of an insurance company is transferred to a collective investment scheme in return for units in the scheme (ie the insurance company has “seeded” the scheme).

Those anti-avoidance rules are contained in subsections (4ZB) and (4ZC) and they apply as follows. Where an insurance company has seeded a collective investment scheme and there is a disposal or part disposal of the seeded assets within three years after the end of the accounting period the seeding occurred, the gain that would otherwise be spread over later years is treated as having accrued in the year of disposal.

{#}Example: annual disposals and application of section 213(4ZB) and (4ZC) TCGA

  • In accounting period (AP) 1 there is a transfer of an asset to which section 211B applies. The amount of consideration that is used to arrive at a no gain no loss position is £1m. The insurance company receives 10 units in a co-ownership authorised contractual scheme (CoACS) which have a TCGA base cost of £1m.
  • At the end of AP 1 – under section 212 TCGA – the units are deemed to have been sold and reacquired at market value which is £2.4m. The company is deemed to have accrued a gain of £1.4m which in accordance with section 213 is to be spread over 7 years with 1/7 being brought into charge at AP 1 and 1/7 for the next APs. The CG cost of those units carried forward to AP 2 is £2.4M.
  • Shortly after the end of AP 1 the insurance company sells the units to a third party, i.e. not a deemed disposal within section 212. The market value has only slightly increased by £1,000 therefore the chargeable gain in AP 2 would, but for the anti-avoidance rules be £1,000 plus the 1/7 of the gain in AP 1 is calculated under section 212.
  • The anti-avoidance rule in section 213(4ZB) directs that in such a situation the gain spread over years 3 -7 is deemed to have accrued in AP 2. Therefore the total gain on the disposal of these units in AP 2 is £1,000 plus £1.2m.

{#}Annual disposal: holdings of seeded and other units

At the time an insurance company makes an actual disposal of units in a CoACS they may hold both seeding units (units acquired following a transfer to which section 211B applied) and other units (for example, purchased from a third party).

Up to 31 December 2017 section 213(4ZC)(a) provides that, for the purposes of section 213(4ZB), the units acquired by way of a section 211B transfer are treated as having been disposed of before units acquired by other means.

From 1 January 2018, seeded units are treated as a separate holding to other units the insurance company may hold in the same scheme – see new paragraph (za) in subsection 213(4ZC). This avoids potential distortions in the chargeable gains calculation where seeded and non-seeded units are combined.