Tax Transparant Funds and Loan Relationships

A curio on the tax transparent fund ("TTF") legislation. (See post of the 9th May for a description of the tax regime for TTFs).  This note covers the co  - ownership structure TTF (described as CTTF below) but not  partnership TTFs.

For a CTTF holding assets subject to chargeable gains tax the position is as follows .  TCGA 1992 section 103 D prevents the assets in the CTTF being subject to CGT but provides that the holding in the CTTF is treated as if it were a unit in an unauthorised unit trust.  I'm not quite sure why the unauthorised unit trust wording is used but the intention is clearly to prevent the CTTF being transparent for capital gains tax purposes.  This will be administratively convenient for life insurance companies investing BLAGAB assets as they will be able to treat the CTTF as a single asset for CGT rather than having to calculate CGT on all the assets held in the CTTF.

But what is not clear is what the tax analysis is for loan relationship assets held in a CTTF.  For authorised unit trusts there is CTA 2010 617 which prevents the income of the trust being taxed in the hands of the trustees ( I think that for these purposes  loan relationship gains and losses are included as income) and instead provides that the authorised unit trust is liable to corporation tax.  (Regulation 10 of SI 2006/964 then takes authorised unit trusts outside of the loan relationship regime in respect of gains and losses on assets).

However, there are no equivalent provisions for CTTFs nor would I expect anything similar as the whole point of the CTTF is that its transparent for income.  It does though seem that there is a risk that loan relationship gains and losses on assets held within a CTTF will be taxed / relieved twice.  That is via the loan relationship regime on a look through basis and under the CGT rules on the deemed holding in an unauthorised unit trust.  What I think comes to the rescue here is CTA 2009 464 that gives the loan relationship priority for corporation tax purposes.  This could be seen as meaning that the look through loan relationship basis trumps taxing the gains under the capital gains tax regime.  This would have the benefit that you would seem to end in a sensible position i.e. taxing loan relationship assets under the loan relationship regime.

But the analysis is not straightforward and it would be good to have some comfort that this is the way that HMRC would expect life insurance companies investing BLAGAB assets in CTTFs to be taxed.  Actually there are quite a number of areas of life assurance legislation where HMRC guidance would be useful.  A good idea might be to make all that advice available in a single place - you could call it the Life Assurance Manual.