LLM8180 - Capital gains: Names: special reserve funds

See LLM5230+ for details of the special reserve fund (SRF).

Income and gains on assets held in SRFs are tax free while they are in the fund. Although the Name is the beneficial owner of the assets in the fund for tax purposes, there is no charge to capital gains tax on the Name or the trustees when assets within the fund are sold.

Other than the original transfer from on old style SRF, it is not possible to transfer assets other than cash into an SRF; and other than at cessation, when the fund is wound up, no assets other than cash can be withdrawn.

Names sometimes request shares be transferred from their personal portfolios into their special reserve fund in exchange for cash held in those SRFs. Since the trustees may only accept cash into the fund (apart from the initial transfer from an old style SRF), this kind of substitution is not permissible.

Transfer of SRF assets to Name on cessation

On cessation the amount held in the SRF is paid over to the Name or his personal representative as directed (FA93/SCH20/PARA7 (2)). If the fund consists of non-cash assets the Name or personal representative can direct that the assets themselves are released (unlike other circumstances of withdrawal, when assets are not released by the trustees of the fund).

For capital gains purposes, the assets are deemed to be acquired by the Names or personal representative on the last annual valuation date, for a consideration equal to their market value at that date (FA93/SCH20/PARA11 (4)), provided that the assets were held in the SRF at that date, and continuously until the date of the transfer.

If the assets are released before the final valuation date, the Name is treated as acquiring the assets on the date of transfer and for the market value at that time (regulation 6(5) SI1999/3308). The value of the assets at the date of transfer is added to the charge on cessation.

If the assets are acquired after the final 31 December valuation, and then transferred to the Name, the Name is treated as acquiring the transferred assets on the date at which the trustees of the fund acquired the assets, and for the consideration paid by the trustees.