IFM13288 - Offshore Funds: participants in offshore funds: participants within the charge to corporation tax: disposals: non-reporting funds: exchanges of interests in different classes

Regulation 37 of SI 2009/3001

In any case where a non-reporting fund is constituted by a class of interest in “main arrangements” (see regulation 6 and section 361 TIOPA 2010) it is possible that a different class of interest in the same main arrangements may be a reporting fund.

Regulation 37 prevents section 127 of The Taxation of Chargeable Gains Act 1992 (‘TCGA’) (equation of original shares and new holding) from applying in any case where an interest in a non-reporting fund is exchanged for an interest in a fund that is not a non-reporting fund (where those funds are both constituted by classes of interest in the same main arrangements) where such an exchange might otherwise constitute a reorganisation within that section and to which that section would otherwise apply.

Where such an exchange of interests takes place, and regulation 37 provides that section 127 TCGA does not apply, then regulation 37(6) determines that the exchange will be treated as a disposal of the interest in the non-reporting fund.

The disposal is deemed to have taken place at market value (at the time of the exchange) for the purposes of calculating the offshore income gain arising to the person disposing (or deemed to dispose) of their interest.

Where such an exchange leads to an amount being charged to tax as an offshore income gain then see IFM13540 for the effect on capital gains.

While regulation 37 applies in circumstances where an interest in a non-reporting fund (class of interest) is exchanged for an interest in another class of interest in the same arrangements that is not such a fund this regulation applies for the purpose of offshore income gains only and that no capital gain can arise solely as a result of an event to which this regulation applies. If an investor switches from an interest in a non-reporting fund to a reporting fund at a loss such a loss will be a capital loss.

However where such an exchange leads to an amount being charged to tax as an offshore income gain then the acquisition cost on which any later capital gain or loss is based is the deemed disposal consideration on the exchange

Protected Rights under regulation 30

If the holding which is exchanged includes an element of ‘protected rights’ under regulation 30 then no charge to tax on an offshore income gain will apply to that element of the holding and there will be no deemed disposal of that element of the holding.