IFM13386 - Offshore Funds: participants in offshore funds: participants within the charge to income tax: disposals: non-reporting funds: exchanges of securities and schemes of reconstruction

Regulation 36A of SI 2009/3001

Regulation 36A replaced previous regulations 35 and 36 with effect from 8 June 2013.

Regulation 36A prevents the following sections of TCGA 1992 from applying in any case where an interest in a non-reporting fund is exchanged for an interest in an entity that is not a non-reporting fund:

a) Section 103G (exchange of units for those in another collective investment scheme),

b) Section 103H (scheme of reconstruction involving issue of units),

c) Section 135 (exchange of securities for those in another company), and

d) Section 136 (scheme of reconstruction involving issue of securities).

Where such an exchange of interests takes place, regulation 36A then determines that the exchange will be treated as a disposal of the interests in the non-reporting fund.

The disposal of interests in the non-reporting fund 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 the interest.

While regulation 36A applies in circumstances where an interest in a non-reporting fund is exchanged for an interest in an entity that is not such a fund, it should be noted that 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 does lead 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.

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.