OFM27600 - Reporting funds: tax treatment of participants in reporting funds: disposals of interests - example

Example

The following example uses a fairly simple scenario to illustrate how an investor might determine base cost for chargeable gains purposes. It uses an example fund that does not operate equalisation.

Liz is a UK resident. She purchases 10,000 units in X Equity Fund, a Guernsey open-ended investment company, on 1 May 2010 for £2.50 per unit. She disposes of all of the units on 31 December 2016 for £4.50 per unit.

The fund’s aim is to provide a mix of income and capital growth. It has a policy of distributing 25% of its income to investors and accumulating the rest. The fund prepares its accounts to 31 December each year, and makes distributions on 31 March. It sends a report to each of its investors electronically on 1 May each year (containing the information required by regulation 92 - including details of actual distributions and the ‘excess’ of reported income per unit over the sums actually distributed). The fund is not a bond fund.

Liz received the following distributions and reports of excess of reported income -

Liz receives a total of £45,000 on the sale of her units. She has been charged to income tax on all sums distributed to her, and she has also been charged to income tax on the ‘excess’ income accumulated within the fund and reported to her each year, as shown above (regulation 95(4) provides that the excess income specified by regulation 94(1) is charged to tax under S.397A ITTOIA 2005, as would the sums actually distributed to her in accordance with normal principles).

The sums actually distributed to Liz are ignored for the purposes of calculating her base cost for chargeable gains tax. The value of the accumulated sums, however, is reflected in the price that Liz receives on the sale of her units. As Liz has already been charged to tax on those sums, and in order to avoid a potential double charge to tax, the total of the accumulated income (£9,060 - the total from the column headed ‘sum accumulated’ above) is, in addition to the sum Liz paid for the units on acquisition, treated as falling within S.38(1)(a) TCGA 1992 (acquisition and disposal costs).