On 17 September 2019 HM Treasury announced draft regulations for consultation which amend the existing legislation for the Non-Resident Capital Gains Tax (NRCGT) regime. The amendments are open for consultation until 25 October 2019 and are expected to come into force on 1 January 2019. Most of the changes will be retroactive from 6 April 2019. The amendments are being made following feedback received from professional investors and advisory firms on a number of practical issues that have been identified. The changes mainly correct minor errors in the existing legislation and clarify the way particular rules are intended to operate. The amendments specifically focus on the rules pertaining to collective investment vehicles (CIVs) and their investors.
The full draft regulations and the accompanying explanatory memorandum are set out here.
A high level summary of the key changes is as follows:
- The changes ensure that only directly held companies of CIVs are eligible to make the Exemption Election. There had previously been some uncertainty around whether indirectly held subsidiaries would be able to make the Exemption Election in respect of themselves. The new rules clarify that this is not possible and that it was never intended that they should be able to;
- CIVs that make the Transparency Election are required to provide certain information at the time of making the election and file partnership tax returns on an annual basis. The new rules clarify that the partnership tax returns should be filed annually regardless of whether any partnership property has been disposed of or not. They also clarify that the partnership returns only need to include details of relevant gains/losses and not the full income of the fund. There is also a new requirement for investors details to be provided upon making the Transparency Election;
- One of the conditions that can be met in order for an entity to qualify for the Exemption Election is known as the Genuine Diversity of Ownership (GDO) condition. To meet the GDO condition a CIV must be setup and managed to enable a diverse range of investors to benefit from access to the fund manager and the economies of scale that come from pooling funds. The new changes amend the rules so that CIVs which existed as at 6 April 2019, or that are structured as partnerships, trusts or contractual schemes do not fail to meet the GDO conditions where they are widely held in practice, but fail to meet the conditions for technical reasons; and
- Provided an Exemption Election has been made by the CIV in question, the existing rules exempt disposals made by holding vehicles which are wholly owned by certain investors who would normally be exempt from tax on chargeable gains (e.g. overseas pension schemes). The proposed amendments bring into scope further commonly used structures (such as Property Authorised Investment Funds) which the existing rules did not accommodate. The amendments also now allow this treatment to be adopted where a Transparency Election has been made which was not previously the case. However, we note that there is currently some uncertainty on how underlying property disposals would be treated where the Transparency Election applies.
We recommend that all managers of and investors in CIVs review the new rules with a view to assessing their impact. However, we also recommend that where possible, no definitive action is taken until the updated regulations are finalised and the associated updated guidance is issued.
For further information please contact: