LAM03320 | Calculation of ‘I’ Income and chargeable gains: Collective investment schemes not subject to TCGA92/S212

Investment Trusts

Shares in UK investment trust companies are broadly treated the same as shares in a UK listed company and are not subject to FA12/S212.

Unauthorised Unit Trusts CTM48130

Unauthorised unit trusts are established for a variety of reasons. They may be used to invest in property where the lack of liquidity prevents a trust from being authorised, or they may be used where the class of unit holders is a restricted one. The chargeable gains of an unauthorised unit trust are assessable to Capital Gains Tax on the trustees unless the trust is classified as an exempt unauthorised unit trust (EUUT) – see The Unauthorised Unit Trusts (Tax) Regulations 2013 (SI 2013/2819).

An EUUT’s issued units must be held throughout the year of assessment by ‘eligible investors’. ‘Eligible investors’ are either wholly exempt (other than by reason of residence) from the charge to Capital Gains Tax or corporation tax on chargeable gains or, for insurance companies, ignoring any corporation tax on income. Examples would be pension funds and life companies writing only unit linked pension business. There are no life specific rules for UK resident UUTs and these holdings are not within the scope of S212.

Bond Funds

Relevant interests in OEICs, authorised unit trusts and offshore funds that fail to satisfy the qualifying investments test are excluded from the scope of S212 as they are subject to tax as loan relationships. The qualifying investment test requires that interest related securities related instruments and derivatives do not exceed 60% of their total assets, at any time during a company’s accounting period. CTA09/490(7) excludes from relevant holdings transparent funds, where income is taxed directly on the investor. The full explanation of the rules on bond funds is in the Corporate Finance Manual (see CFM43000).

Life company relevant holdings in a bond fund are creditor loan relationships and the holdings must be accounted for and taxed in accordance with the loan relationship rules. Interest distributions from bond funds, along with any increase in value of the holding, are credits within CTA09/S490(2) and (3).

The same valuation rules apply to derivative contracts held by a company whose underlying subject matter is an interest in a bond fund CTA09/587.

As the loan relationship rules have precedence over other corporation tax rules, where the bond fund rules apply TCGA1992/S212 will not.

Partnerships

Where a UK life company holds an interest in a partnership it is liable to corporation tax on chargeable gains on the underlying assets as they arise and S212 should not be applied to the partnership holding. See LAM03600 for simplification of the chargeable gains rules that facilitate calculation of partnership chargeable gains for venture capital investment partnerships in certain circumstances.