Non - statutory clearance service guidance

HMRC do offer a non  - statutory clearance service to, subject to certain conditions being met, provide a view on any genuine legislative uncertainty.

HMRC information on non  - statutory clearance is here.

Corporate Capital Loss Restriction

HMT / HMRC have now published the outcome to the consultation on the restriction of loss relief for corporate capital losses.

The consultation is here 

And accompanying draft legislation is here  

I think the new legislation will be included in FA 2020.

The result is a mixture of good and bad news:

The bad news is that for accounting periods commencing after 1 April 2020 the offset of brought forward corporate capital losses is limited to 50% of the capital gains of a subsequent accounting period plus an additional deductions allowance of up to £5m. (But there is only one £5m deduction allowance for a group of companies and the £5m is a total amount which has to be shared between trading, non -trading and capital losses.)

HMT / HMRC are stuck in only thinking about loss reliefs as a source of additional revenue or as a means of attracting inward investment.  There is no acknowledgement that simplicity, equity between tax payers and economic efficiency should be features of a system of taxation; the result is legislation that lacks coherence and is wildly over complicated for the amount of revenue raised.

But for life companies there is good news. It was originally intended the capital loss relief  restrictions would apply to the shareholder's share of BLAGAB losses(i.e. losses referable to BLAGAB.) when those losses were set against BLAGAB gains of a subsequent period. As well as being an unwelcome restriction on loss utilisation, this would have made allowing for capital losses in the pricing of unit linked funds even more complicated than it is at present.

Happily in the outcome to the consultation HMT / HMRC conclude "The Government will therefore legislate to ensure that there is no restrictionn of BLAGAB losses against BLAGAB gains."  This is a very welcome change and life insurance companies that only have BLAGAB gains and losses (which is probably most life insurance companies) will be unaffected by the new capital loss rules.

Reading through the legislation for the first time I rather struggled to see how it worked to ensure there was no restriction on the offset of BLAGAB losses against BLAGAB gains.  The rules do work, however, and I have made some notes on the mechanics below.

Legislation

Legislation Prior to Restriction

TCGA 1992 section 2A provides for capital gains of an accounting period to be calculated net of losses of the period and losses brought forward from earlier periods. 

For life insurance companies section 2A is subject to TCGA 1992 section 210A.  This section divides life insurance capital gains into BLAGAB and non  - BLAGAB amounts.  BLAGAB gains / losses are, the amount of total gains referable to BLAGAB.  

Non  - BLAGAB gains / losses as defined by TCGA 1992 210A is rather confusing terminology, it doesn't mean gains referable to the non  - BLAGAB computation but, rather gains and losses calculated using CGT rules other than BLAGAB gains and losses.  As far as I can see all that would be included in this category would be assets subject to capital gains tax that are part of the life insurers long term business fixed capital.

Section 210A (10A) - 10C) prescribes a methodology for identifying a shareholder proportion of BLAGAB gains and losses.  TCGA 210A (2) limits the offset of non  - BLAGAB losses to the shareholder share of BLAGAB gains.  And TCGA 210A (3) - (9) sets out the rules which allow the shareholder share of BLAGAB losses to be set against non  - BLAGAB gains.
 

FA 2012 section 75 defines BLAGAB chargeable gains as gains that accrue on the sale of assets held for the purposes of a company's long term business and states that BLAGAB gains for a period are net of BLAGAB losses of that period and BLAGAB gains brought forward.

Revised Legislation 

TCGA 1992 section 2A which provides that chargeable gains are calculated net of chargeable losses is unchanged by the draft legislation.  However, the draft legislation includes a new CTA 2010 section 269ZBA which restricts the offset of brought forward capital losses to a "relevant maximum" which is 50% of the gains of a future period plus the chargeable gains deductions allowance for the period (i.e the £5m offset per group which is shared across all loss types).  There is nothing in TCGA 19922A which hints at the existence of 269ZBA which is in keeping with the clunky drafting which characterises all the new loss relief legilsation.

The legislation in TCGA 210A (10A) - 210 (10C) is unchanged by the revisions.  Accordingly the calculation of the shareholder proportion of BLAGAB gains is unaltered.  However, a new section CTA 2010 269ZFC is introduced to restrict the offset of brought forward non  - BLAGAB losses against the shareholders share of BLAGAB gains, introducing the same 50% plus the appropriate amount of the deductions allowance rule set out in section 269ZBA.  The rules here are very complicated and are not covered in this post. 

However, the most important point is that there is nothing in the proposed amendments to the legislation to change FA 2012 section 75. Accordingly, BLAGAB gains are calculated as before, i.e. with the offset in full of BLAGAB losses against BLAGAB gains.  And this point is reinforced by an amendment to TCGA 1992 210A(13) which makes it clear BLAGAB chargeable gains are calculated net of BLAGAB chargeable losses.  It is only when loss relief is being considered across the non  - BLAGAB / BLAGAB divide that the 50% limitation comes into effect.

 



 

   

Update on Non - Residents Investing in Commercial Property

This post covers legislation for the taxation of capital gains of non  - residents investing in UK property, including gains from assets deriving 75%+ of their value from UK land where a non  - resident investor has a "substantial indirect interest" in that land.  Statutory references are to TCGA 1992 unless other - wise stated.  HMRC's draft guidance on the legislation is included as appendices 14&15 to the CGT manual.  My original post on the consultation is here.

Overview

Original consultation suggested charge to tax on UK property gains of non  - residents would apply to non - resident collective investment vehicles (CIVs).  If implemented this would have made non - UK resident CIVs unsuitable as property investment vehicles for UK life insurance companies.  This is because the proposed rules would have resulted in an inappropriate tax charge for pension business investment in UK property via an offshore CIV as there would be no recovery of the non  - resident CGT charge in the CIV for the pension investor. And for BLAGAB UK property investment via an offshore CIV there would be double taxation, once in the collective on its property investments and again in the I-E tax computation which, probably via the deemed disposal rules in Section 212, would tax the gain on the holding in the CIV.

This issue was raised during the consultation period and HMRC have responded by allowing non  - resident CIVs to elect out of the non  - resident CGT charge on UK property.  Accordingly, offshore "UK property rich" CIVs such as JPUTs remain appropriate for UK property investments of life insurance companies.  There might, however, be difficulties if the non  - resident UK property rich CIV cannot make either of the two elections or chooses not to make an election.  But presumably it will be possible to confirm the UK tax status of an offshore UK property rich CIV, with the fund manager.

However, to balance the relief provided to offshore UK property rich CIVs from UK CGT,  non  - resident investors in property rich CIVs are more likely to be caught by the legislation than was proposed in the consultation.  This is because the rules that tax gains on assets deriving 75% or more of their value from UK land (Section 1A (3) (c) and, for companies, section 2B (4)(b)), apply where the taxable person has a "substantial indirect interest" in that land.  Generally a person only has a substantial indirect interest if they dispose of rights in a company and they held a 25% investment in that company at a point in the two years prior to the sale. (Schedule 1A paragraph 9). However, for investments in UK property rich CIVs, the 25% holding rule does not apply and therefore all gains of non - residents from such vehicles are within the charge to UK CGT.  This applies to investments in UK vehicles such as PAIFs and REITs as well as non  - UK resident CIVs.

One group of non  - residents seemingly impacted by the rules are non  - resident life insurance companies.  These companies may be brought within the UK charge to tax on corporate gains if they have investments in UK property rich CIVs.

Layout of the Legislation

FA 2019 introduces a new TCGA Section 1A (Territorial Scope) which brings gains to individuals on, UK residential land, and assets that derive 75% of their value from UK land where the person has a substantial indirect interest in that land, into the charge to UK CGT.

Section 2B applies equivalent rules to disposals by UK companies.  

Schedule 1A  Contains the rules for determining when an asset derives 75% of its value from UK land and what constitutes a "substantial indirect interest" in land.

Schedule 4AA  Contains certain computational provisions, and

Schedule 5AAA Includes detailed rules for CIVs, but

For rules on reporting non  - resident gains you need to go to FA 2019 schedule 2

Detail on Rules for Property Rich Collective Investment Vehicles

There is specific legislation for property rich collective investment vehicles (CIVs) in Schedule 5AAA.  This schedule defines CIVs as Collective Investment Schemes, Alternative Investment Funds, UK REITs and offshore structures equivalent to UK REITs (The legislation doesn't use the phrase offshore REIT, but this is apparently what it is trying to target).  The basic rule (paragraph 4)  is that other than for partnerships (which remain fiscally transparent) offshore CIVs are companies for CGT purposes.

Accordingly, sales by a participant in a UK property rich CIV are within the charge to UK CGT as they are assets deemed to be shares that derive 75%+ of their value from UK land.  Additionally paragraph 6(1)(b) of schedule 5AAA states that where a disposal has an "appropriate connection" to a CIV the person making the disposal has a substantial indirect interest in UK land.  Accordingly, the 25% holding requirement in Schedule 1A(8) is not relevant for disposals which have an "appropriate connection" with a property rich CIV.  There is some fiendishly complex legislation around what constitutes an "appropriate connection" but the basic point is that the sale of an interest in a UK property rich CIV by a non  - resident is likely to be in charge to tax for CGT / tax on corporate gains.

Part 5 of Schedule 5AAA gives the Treasury power to make regulations allowing the managers of property rich CIVs to elect to both supply information on disposals by non  - residents and to withhold amounts of UK CGT / corporation tax due on such disposals.  From an exchange of emails with HMRC it would seem that a decision has not yet been taken over whether such regulations will be brought forward and in any event it seems the intention is that it will allow rather than require reporting and deduction.

In the absence of reporting and deduction by the managers of property rich CIVs non  - resident investors in such schemes will be within the reporting rules in schedule 2 of Finance Act 2019.  In short this requires disposals to be reported, and an estimate of the tax due paid, within 30 days of completion.

Life Company Specific Legislation 

I have picked up the following specific references to life insurance companies in the legislation.

Schedule 4AA paragraph 2 (4). 

This paragraph sets out persons who are only chargeable to non - resident CGT on residential property disposals from 6 April 2019 and includes "a company carrying on life assurance business (as defined in section 56 of the Finance Act 2012) where the interest in UK land was, immediately before that date, held for the purpose of providing benefits to policyholders in the course of that business."  

I think the point here is that the general rule for non  - resident gains on UK property is that only gains arising after 6th April 2019 are taxed but for residential property the start date for CGT is 6 April 2015, as residential property sales by non residents were already within the charge to UK CGT from that date.  However, certain non  - resident investors including life insurance companies were able to elect out of the UK residential property CGT charge  (See Section 14F now repealed).  There is (at least as far as I can make out) no equivalent "opt out" for non  - resident life insurance companies from the 2019 legislation but this section ensures their liability to CGT is on property gains arising from 6th April 2019 onwards even on residential property (subject to an election to calculate the gain over the life of a holding).

Schedule 5AAA Paragraph 10

This paragraph relates to one of the two exemptions for offshore CIVs from the UK non  - resident CGT regime, the transparency election.  The transparency election allows non  - resident CIVs that are transparent for income to be treated as partnerships for gains so that the CIV is exempt from UK CGT but the participants pay tax on their share of gains on the underlying assets.  I think the expectation is this election will be of relevance to CIVs with a small number of investors most of whom are tax exempt and might include investments by UK life insurance companies.  Paragraph 10 provides:

"The election is treated as having no effect for the purposes of this Act in relation to any units in the vehicle which are held by an insurance company for the purposes of its long-term business."

The point here is that if an insurance company does invest in a CIV that makes the transparency election and if a portion of that investment was referable to BLAGAB it would be necessary to calculate the capital gain on each underlying asset held by the CIV which might be a significant compliance burden.  Accordingly, where the transparency election is made it does not apply to a UK life insurance company, which for BLAGAB will continue to calculate capital gains as before (probably under deemed disposal legislation).

Schedule 5AAA paragraph 33.  

This paragraph exempts UK property gains from the non  - resident CGT charge where:

"An exemption has been made under Schedule 5AAA for a qualifying fund or company, and

A participant in the fund disposes of a unit, and

The participant is a company which is wholly owned by one or more investors listed in paragraph 33."

If these conditions are met any gain accruing on the disposal is not a chargeable gain.  

The investors listed in paragraph 33 (4) include "a company carrying on life assurance business where, immediately before the disposal, its right or interest in the participant is an asset which, applying the rules in section 138 of the Finance Act 2012, is wholly matched to a liability of its life assurance business that is not BLAGAB." and

"A company carrying on long-term business none of which is BLAGAB where, immediately before the disposal, its right or interest in the participant is an asset held for the purposes of its long-term business"

It seems that what this section is trying to deal with is the situation where an investor that is exempt from UK tax uses a wholly owned vehicle as an intermediary to invest in an offshore property rich CIV which has made an election to be exempt from UK CGT.  Although both the investor and the CIV are exempt from CGT the intermediary company is not and might not be able to make an election under Schedule 5AAA paragraph 12. This legislation ensures there is no non  - resident CGT charged on the intermediary corporate investor and includes wholly owned subsidiaries which are non  - BLAGAB linked assets or owned by insurance companies with no BLAGAB.

The circumstances here are sufficiently esoteric that, presumably, some life insurance companies do use intermediary corporate structures for pension investment in UK property rich CIVs.

Taxation of Hybrid Capital Instruments

1. Background

Insurance companies are (along with banks) large scale issuers of subordinated debt.  Debt is subordinated if it ranks behind policyholders and other creditors on a winding up and if in certain circumstances (such as capital less than the SCR) payments of interest and redemption of the debt are suspended.  There might also be provisions for certian trigger events to result in the right down of the subordinated debt or its conversion to share capital.

In the absence of specific tax legislation the "interest" payable on subordinated debt would (arguably) be a distribution as payment is dependent on the results of the issuing company.  The possibility of issuing a capital instrument with tax deductible "coupons" was attractive to insurers and banks and, presumably, felt to be desireable by the government.

As a result SI 2013 / 3209 and SI 2015 / 2056 provided that interest paid on regulatory capital of banks and insurers would be tax deductible interest.

The legislation in SI 2013 / 3209 has now been repealed and is replaced by direct legislation. The motivation for the change was that Holland also had special tax rules for regulatory capital of insurers and banks which were challenged by the EU commission.

The Legislation

Schedule 20 FA 2019 repeals SI 2013 / 3209 and SI 2015 /2056 and replaces a specific deduction for coupons paid on regulatory capital with a wider relief for payments on hybrid capital instruments.  This legislation is incorporated into the loan relationships legislation in part V of CTA 2009 as follows.

Section 420 A (2) provides that any qualifying amount payable in respect of the hybrid capital instrument is not a distribution.

420 A (3) defines a qualifying amount as one that would not be regarded as a distribution if it is assumed that any provision made by the loan relationship under which the debtor is entitled to defer or cancel a payment of interest under the loan relationship had not been made.  It's worth noting this is a weaker provision than was included in SI 2013 / 3209 and it is still necessary to consder whether terms of the subordinated debt other than deferring or cancelling interest (such as bailing in creditors in certain circumstances) might make the payments a distribution.

Hybrid Capital Instrument

The definition of a hybrid capital instrument is at CTA 2009 475 C, reproduced below,

475C(1)  For the purposes of this Part, a loan relationship is a “hybrid capital instrument” for an accounting period of the debtor if–

(a)

the loan relationship makes provision under which the debtor is entitled to defer or cancel a payment of interest under the loan relationship,

(b)

the loan relationship has no other significant equity features, and

(c)

the debtor has made an election in respect of the loan relationship which has effect for the period.

Sections 475C (3) - (7) define the term "has no other significant equity features". I have only read through this wording once but it seems to be that it is envisaged most subordinated debt issued by insurers will meet the criteria and coupon payments will be tax deductible interest provided an election is made.

Implications

The repeal of SI 2013 / 3209 and its replacement with new legislation for hybrid capital instruments extends the range of companies that might be able to benefit from tax deductible payments on loans that have limited equity features.

For insurers it is tempting (and perhaps largely true) to say nothing has changed as I think most subordinated debt within SI 2013 / 3209 will be hybrid capital instruments.  But there are a couple of additional hoops to jump through:

Previously the tax adviser could be pretty happy that provided a subordinated debt was regulatory capital then coupons payable on it would be tax deductible.  Now it will be necessary to decide whether the subordinated debt is a hybrid capital instrument, which would, presumably, require a detailed review of the terms of the instrument (even if in most cases you kind of know the answer will be, yes it is).  Additionally an election has to be made if amounts payable are not to be treated as distributions.

The election

The time limits and other conditions for the election are set out at section 475 C (8).  The election is irrevocable, applies to the period the company becomes party to the loan relationship and all subsequent periods.

The election must be made within 6 months from the day the company becomes a party to the loan relationship, but

If the relationship is in force on 1 January 2019 the six months referred to above is changed and the election is to be made before 30 September 2019.  (This extension is retained in FA 2019 schedule 20).

Other Rules

In addition to the above the legislation makes provision for:

Subordinated debt that was within the SI 2013 / 3209 regime but which does not come within the hybrid capital instruments legislation. (Looks as if this stays within the old rules until 2023). 

Ensures amounts in respect of hybrid capital instruments accounted for in equity are still treated as being brought into account for the purposes of the loan relationship legislation.  

An anti - avoidance provision.

Exemption from all stamp duties for hybrid capital instruments. 

Unlike SI 2013 / 3209 the legislation does not automatically provide for relief from withholding tax for interest payments made on hybrid capital instruments.  So the withholding tax position is another issue to be dealt with "from scratch".