IFM40370 - Becoming a QAHC: moving assets into the ring fence

FA22/SCH2/PARAS 22 and 23

PARAS 22 and 23 deal with situations where assets move across the QAHC ring fence ‘boundary’. These rules are designed to apply where, although there has been no disposal of an asset by the QAHC, a change of use, or a change of status of that asset means that, for the purposes of the QAHC regime, it is considered to have moved from the QAHC ring fence business to the non-ring fence business, or vice versa.

When such movements across the ring fence boundary occur, the rules in PARAS 22 and 23 operate to impose a deemed disposal and reacquisition of the relevant asset, with both deemed transactions taking place at market value.

Movement of assets into the QAHC ring fence business

PARA 22(1) provides PARA 22(2) applies where one of the following assets held by a QAHC outside its QAHC ring fence business moves into the ring fence due to a change of use or status or otherwise:

  • Overseas land;
  • A loan relationship which the QAHC is party to for the purposes of an overseas property business, to the extent that, when apportioned on a just and reasonable basis, the loan relationship or contract is attributable to those purposes, and the profits arising from that relationship or contract are exempt by virtue of the QAHC overseas property exemption rules in PARA 52(4);
  • Anything that is a qualifying share once within the QAHC ring-fence business.

In relation to any asset which falls within the scope of PARA 22(1) above, PARA 22(2) imposes a deemed disposal and re-acquisition of that asset for corporation tax purposes.

The disposal is deemed to take place immediately before the asset enters the QAHC ring fence.

The re-acquisition is deemed to take place immediately after the asset enters the QAHC ring fence.

Both the deemed sale and deemed re-acquisition are treated as having taken place at market value (PARA 22(7)).

PARA 22(3) provides that any chargeable gain or allowable loss accruing on a deemed disposal under PARA 22(2) arises outside the QAHC ring fence. This ensures that any such gain or loss will be subject to the normal corporation tax rules.

Example

A QAHC holds shares in an investee company. The investee company only holds UK land and property. As such, those shares are not qualifying shares per PARA 53, as more than 75 percent of the value of the shares is derived from UK land – the investee company is UK property-rich.

The investee company then disposes of 50 percent of its UK property portfolio, and invests the proceeds in overseas property. Although the QAHC has not made any change to its own investment, as less than 75 percent of the value of that investment is now derived from UK land, those shares are now qualifying shares. The investee company is no longer UK property rich.

As such, PARA 22(1) and (2) apply, and the QAHC is deemed to have disposed of the shares immediately before they entered the QAHC ring fence, and required them immediately after they did so.

In this case, the deemed disposal gave rise to a chargeable gain of £150,000. In accordance with PARA 22(3), this gain is deemed to arise outside the QAHC ring fence, and is subject to the normal corporation tax rules on chargeable gains.