LAM03650 | Calculation of ‘I’ Income and chargeable gains: Chargeable gains from venture capital limited partnerships TCGA92/Sch7AD: Interaction with other legislation

Interaction with offshore funds legislation

The provisions of the offshore fund rules are specifically stated to apply regardless of the application of TCGA92/SCH7AD. In particular, the company’s interest in an overseas VCIP is not treated as a material interest in an offshore fund TCGA92/SCH7AD/PARA7(1). This allows the offshore fund rules to apply, where relevant, if the partnership holds a material interest in an offshore fund IFM12000.

If an offshore income gain accrues and a distribution is made, TCGA92/SCH7AD/PARA7(2) prevents any double taxation. The disposal consideration for SCH7AD purposes is reduced by the amount of the whole or corresponding part of the offshore income gain.

Interaction with other legislation

If a VCIP holds more than 50% of a company’s shares, that company is likely to be a close company, or would be close if UK resident. This is because if there is at least one partner which is not a non-close company (such as an individual or pension scheme), CTA10/S448(1)(a) will have the effect of giving to such a partner all the rights and powers of all the other partners.

In these circumstances, TCGA92/S13 could apply where wholly artificial arrangements were put in place as part of a tax avoidance scheme or arrangements with the purpose or one of the main purposes of avoiding UK Capital Gains Tax or Corporation Tax (the test under TCGA92/S13(5)(cb)). If this is the case then these UK residents can be assessed to Capital Gains Tax or Corporation Tax on chargeable gains on a proportionate share of the company’s capital gains. See CG57200 onwards for further details. Such gains accrue separately from the provisions of SCH7AD. In practice, the partnership arrangements are aiming to achieve tax neutrality – each partner is taxed according to their own tax status/residence. As a result these rules would not normally be expected to apply and any cases should be referred to the insurance policy team.

The substantial shareholdings exemption in TCGA92/SCH7AC does not apply in a case where SCH7AD applies, even if the life company would be regarded as having a substantial enough holding in the company disposed of, had it invested directly rather than through the partnership. This is because the gain on the shares does not accrue to the partner, it is the gain on the ‘single asset’ LAM03600 that accrues to it, and the single asset is not a substantial shareholding.

The interest in relevant assets of the partnership is treated as a single asset and the company cannot also make a negligible value claim under TCGA92/S24(2) in respect of any of the underlying assets in the partnership TCGA92/SCH7AD/PARA8.