CG73997M – Property-rich collective investment vehicles in the UK: Interaction with other provisions of TCGA92: De-application of “appropriate connection” – HMRC Internal Handbook

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TCGA92/SCH5AAA/para 7 provides an exception to the processing set out in subsection 6(3), (5) or (6). Where the exception applies, non-resident investors making an indirect sale in a UK property-rich company, which would otherwise have an “appropriate connection” to a CIV, will only fall within the scope of the CGT if they hold a 25% investment in that company (and are therefore within the basic rules of Part 3 of Schedule 1A and not paragraph 6) – see CG73920 et seq.).

Paragraph 7 will apply where the vehicle or vehicles (for paragraph 6(3)(b)) meet the following conditions –

  • The non-British housing condition; and
  • That is
    • the genuine diversity of ownership (GDO) requirement as set forth in Regulation 75(2), (3), (4)(a) or (5) (where, for the purposes of subsection 75(5), Regulation 75(4)(b) is omitted) of the Offshore Funds (Taxation) Regulations 2009 (SI 2009/3001)) or,
    • if the vehicle is a corporation (including a deemed corporation under paragraph 4 of Sch.5AAA), the non-closing condition.

The non-UK real estate condition requires that the prospectus made available to investors in the collective investment vehicle (or vehicles referred to in paragraph 6(3)(b)) does not lead them to believe that the vehicle is likely to hold more 40% of its UK assets on an ongoing basis. This is to prevent the removal of the 25% ownership threshold where a collective investment vehicle satisfies the mechanical test to be wealthy UK property in paragraph 6(1)(a) at any given time, but has been marketed to investors like, for example, a pan-European property fund which is not likely to be primarily UK property focused on a general basis. Paragraph 6 is only intended to apply to funds which are and are intended to be UK property rich.

See CG73999P for further information on the GDO and non-closing conditions, including an explanation of the GDO as amended by the UK Asset-rich Collective Investment Vehicles (Amendment to the 1992 Act) Regulations 2020 on the taxation of billable earnings).

Paragraph 7 does not apply to transfers referred to in paragraph 6(4) where the interest in question is held through a collective investment vehicle. Where such a UCI has assets which derive at least 75% of their value from UK land, for example a British property-rich company or UCI, the partners of such UCI will be deemed to have transferred their fractional interest in this company or UCI (as a result of the normal functioning of the tax system for partnerships). Regardless of the level of interest in this asset, all partners will be deemed to have a substantial indirect interest in the UK.

Regulation 6 of the UK Property Rich Collective Investment Vehicles (Amendment of the Taxation of Chargeable Gains Act 1992) Regulations 2021 (SI 2021/213) introduces new paragraphs 7A and 7B to Schedule 5AAA. These paragraphs provide that, subject to the applicable conditions, paragraph 6 is inapplicable for –

  • foreign life assurance companies (or companies which would be such a company if they carried on life assurance business in the UK through a permanent establishment), and
  • Offshore UCIs

who meet specified conditions and who, when disposing of a holding in a UK property-rich CIS which is a company (deemed under paragraph 4 or otherwise), do not hold a 10% or more investment in that CIS immediately before the transfer. Indeed, the rules provide an exemption for disposals of less than 10% of investments where the conditions are met, in order to remove what might otherwise be disproportionate administrative burdens when disposing of portfolio holdings. This principle goes no further, so there is no “portfolio exemption” of general application. This also does not apply to SIC LPs, or CIVs that have elected to be treated as CIV LPs, yielding less than 10% interest because it is the investors in the fund and not the fund that has an interest. (for UK tax purposes) in the underlying assets.

The relevant conditions (in addition to the requirement of less than 10% investment) are as follows –

  • Foreign life assurance company: Immediately before disposal, not more than 40% of the market value of the assets of the company is derived from investments consisting of interests in UK land, or rights or interests in companies rich in British real estate;
  • Offshore VICs:
    • the vehicle meets the conditions of paragraph 7(2)(a) (the non-UK real estate condition (CG73998V) and 7(2)(b) (the true diversity of ownership condition (see CG73999P) or, if a company, the unclosed condition (CG73998V) and
    • immediately before disposal, the offshore CIV is not a UK feeder vehicle (a CIV is such a vehicle at all times if at least 85% of the market value of its assets is derived from units in a single asset-rich CIV real estate in the UK).

The fact that a foreign life insurance company or an offshore UCI holds a 10% investment in a collective investment vehicle is measured by applying the rule in paragraph 9 (but disregarding paragraph 10) of the annex 1A TCGA as if 25% referrals were 10% referrals.

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