IFM40380 - Becoming a QAHC: crossing the ring fence

FA22/SCH2/PARA23

There will be circumstances where shares which move into the QAHC ring fence business will already have given rise to a chargeable gain. In those circumstances, PARA 23 applies to prevent a double tax charge.

PARA 23 applies where a chargeable gain – the ‘relevant gain’ - accrues to a QAHC as a result of a deemed sale of shares by virtue of PARA 22(2), when shares held outside the QAHC ring fence move into the QAHC ring fence business in accordance with PARA 22(1), and where that relevant gain reflects the disposal proceeds of another asset in respect of which a chargeable gain – ‘the taxed gain’ has accrued to any person. Where PARA 23 applies then the relevant gain which accrues to the QAHC is reduced to take account of the amount of the taxed gain.

Any reduction under PARA 23 is on a just and reasonable basis, and the relevant gain cannot be reduced below nil – so that the application of PARA 23 cannot create an allowable loss for the QAHC.

Example

A QAHC holds shares in an investee entity where 90 percent of the value of the entity, and therefore the value of its shares, is derived from UK land. As such, those shares are not qualifying shares as defined by FA22/SCH2/PARA53(2).

The investee entity then disposes of some of its investments UK land and invests in some overseas land. As a result, 45 percent of the value of the entity, and therefore the value of its shares is derived from UK land.

The shares held by the QAHC have therefore become qualifying shares within the meaning of PARA 53. As such, a chargeable gain accrues by virtue of the deemed disposal rule in PARA 22(2). This deemed disposal gives rise to a gain of £500,000.

However, the investee entity has also been subject to a chargeable gain on the disposal of its investments. That actual disposal gave rise to a gain of £300,000.

PARA 23 provides that where a chargeable gain under PARA 22(2) (the ‘relevant gain’) reflects the proceeds of a previous chargeable gain accruing to any person (‘the taxed gain’), then the relevant gain is reduced by an amount which reflects the taxed gain.

The £500,000 gain on the deemed disposal of shares by the QAHC under PARA 22(2) will be a relevant gain as it reflects the gain realised by the investee company when it sold its UK land. This is because the proceeds from that sale was held by the investee company at the time of the QAHC’s deemed disposal, and therefore reflected in the value of the shares held by the QAHC – and the relevant gain was computed by reference to that value.

As the full amount of the taxed gain was reflected in the value of the investee company, the relevant gain is therefore reduced, on a just and reasonable basis, from £500,000 to £200,000, to reflect that earlier taxed gain.

This reduced relevant gain is treated as a chargeable gain accruing outside the QAHC ring fence.

Holding company example

If, unlike the example above, there was a holding company between the QAHC and the investee entity, then in those circumstances a chargeable gain under PARA 22(2) (the ’relevant gain’) would arise in respect of the shares in the holding company. However, that gain would also reflect the proceeds of the ‘taxed gain’ in the investee entity. As such, the relevant gain arising to the QAHC under PARA 22(2) when the holding company shares become qualifying shares would be reduced to reflect the earlier taxed gain.

Further holding company example

In the situation where, as in the previous example, a disposal by the underlying investee company means that the holding company shares become qualifying shares for the QAHC, then PARA 23 will apply to prevent a double tax charge.

It may be the case that the holding company itself then chooses to become a QAHC, and is subject to the rules within PARA 17 (IFM40330) which may result in a chargeable gain accruing on entry. In those circumstances, PARA 23 will not apply, because the taxed gain will already have been taken into account when calculating the PARA 22(2) gain which accrues to the superior QAHC. However, in those circumstances PARA 19 (IFM40330) may apply so that any earlier chargeable gain accruing on entry to the regime suffered by the superior QAHC can be taken into account.