LLM8180 | Capital gains: Names: special reserve funds

See LLM5230+ for details of the special reserve fund (SRF).

Income and gains on assets held in SRFs are tax free while they are in the fund. Althoughthe Name is the beneficial owner of the assets in the fund for tax purposes, there is nocharge to capital gains tax on the Name or the trustees when assets within the fund aresold.

Other than the original transfer from on old style SRF, it is not possible to transferassets other than cash into an SRF; and other than at cessation, when the fund is woundup, no assets other than cash can be withdrawn.

Names sometimes request shares be transferred from their personal portfolios into theirspecial reserve fund in exchange for cash held in those SRFs. Since the trustees may onlyaccept cash into the fund (apart from the initial transfer from an old style SRF), thiskind of substitution is not permissible.

Transfer of SRF assets to Name on cessation

On cessation the amount held in the SRF is paid over to the Name or his personalrepresentative as directed (FA93/SCH20/PARA7 (2)). If the fund consists of non-cash assetsthe Name or personal representative can direct that the assets themselves are released(unlike other circumstances of withdrawal, when assets are not released by the trustees ofthe fund).

For capital gains purposes, the assets are deemed to be acquired by the Names or personalrepresentative on the last annual valuation date, for a consideration equal to theirmarket value at that date (FA93/SCH20/PARA11 (4)), provided that the assets were held inthe SRF at that date, and continuously until the date of the transfer.

If the assets are released before the final valuation date, the Name is treated asacquiring the assets on the date of transfer and for the market value at that time(regulation 6(5) SI1999/3308). The value of the assets at the date of transfer is added tothe charge on cessation.

If the assets are acquired after the final 31 December valuation, and then transferred tothe Name, the Name is treated as acquiring the transferred assets on the date at which thetrustees of the fund acquired the assets, and for the consideration paid by the trustees.