747 Deduction of offshore income gain in determining capital gain

Summary

This section ensures that there will be no double taxation of gains on disposals of material interests in offshore funds. A disposal which gives rise to an offshore income gain will usually also be a disposal for capital gains tax purposes. In order to avoid a double charge to tax, the sale proceeds or redemption proceeds taken into account when computing the capital gain are reduced by the amount of the offshore income gain. [The result of this is that while, in the case of a material interest acquired before 6 April, 1990, the gain attributed to the period since that date is taxed as an offshore income gain, the gain attributed to the period of ownership before 6 April, 1990 is taxed as a capital gain.]

Details

(1) The section applies to disposals to which the offshore fund provisions apply and to which the provisions of the Capital Gains Tax Acts may also apply. An example would be a disposal of a material interest in a non-distributing offshore fund where the interest was acquired before 6 April, 1990. The capital gains tax provisions would be relevant to the part of the gain which arose on the interest up to 6 April, 1990, while the offshore fund provisions apply to the part of the gain arising after 6 April, 1990.

(2) Specific provisions, set out in subsection (3) and (4), are applied to prevent a double charge to tax on offshore gains. These provisions apply in place of section 551(2). [That section requires the sale or redemption proceeds or other consideration for a disposal of assets which are taken into account for income tax purposes to be ignored for capital gains tax purposes. This would be inappropriate in the case of a disposal of a material interest in an offshore fund since it would mean that although only the part of the gain arising since 6 April, 1990 would be charged to income tax as an offshore income gain, the part of the gain arising before that date could not be charged. The sale proceeds would have to be ignored for capital gains tax purposes since they would have been taken into account for income tax purposes.]

These provisions do not apply where the offshore fund provisions only affect the equalisation element of disposal proceeds. In such instances the general capital gains tax rule, that is, ignore the equalisation element of the disposal proceeds, will give satisfactory results because the balance of the disposal proceeds will be brought into account for capital gains tax purposes.

(3) In computing the chargeable gain arising on any disposal, the amount of any offshore income gain arising on the disposal is deducted from the disposal proceeds brought into the computation of the chargeable gain. In this way no part of the gain arising on the disposal is charged as both an offshore income gain and also a capital gain. No part of the gain suffers double taxation.

(4) In computing chargeable gains arising where part only of an asset is disposed of, the expenditure incurred by the disponer in acquiring the asset has to be apportioned to the part disposed of and the part retained. The apportionment of the acquisition expenditure reflects the consideration received for the part disposed of and the market value of the part retained. The provisions of subsection (3) could distort that apportionment by reducing the amount of the consideration for the part disposed of, used in the apportionment, by the amount of an offshore income gain arising. The distortion is prevented by requiring the apportionment to be made by reference to the full amount of the consideration for the part disposed of.

(5) Where a business is transferred to a company as a going concern in consideration for the issue of shares by the company and other consideration such as cash (see section 600), only part of the total chargeable gain is immediately chargeable – the balance being effectively deferred. The part which is immediately chargeable reflects the consideration other than the shares and the part which is deferred reflects the consideration in the form of shares. The deferred chargeable gain is determined by the formula —

If one of the assets being disposed of gives rise to an offshore income gain, then, in accordance with subsection (3), that gain is deducted from the “total chargeable gain” in the formula and, therefore, the formula would not give the correct result for the deferred gain. In order to prevent this, the offshore income gain is also deducted from the “total consideration” in applying the formula.

(6) In general share-for-share exchanges are not charged for capital gains tax purposes. If the new shares acquired in a share-for-share exchange are subsequently disposed of, they are charged as if they were the same asset as the old shares for the purposes of computing the gain arising. Accordingly, only the cost of acquisition of the old shares is allowed. In order to prevent a double charge to tax, any offshore income gain charged on the occasion of the share-for-share exchange is deductible as consideration given in calculating the gain on a subsequent disposal of the new shares.

(7) In relation to funds operation equalisation arrangements, a double charge could arise where an interest is disposed of to a person other than the fund or the fund managers, for example, where it is to a connected person, or is a deemed disposal by a trustee. However, the amount of the offshore income gain on the disposal is set against subsequent distributions made to the disponer or to persons connected the disponer until the gain is exhausted. Thus, no double charge can arise on the occasion of those subsequent distributions.

Relevant Date: Finance Act 2021