RPSM07109410 - Technical pages: Investments: Taxable property: Indirect Holdings

Indirect Holding

The taxable property provisions apply where an investment regulated pension scheme holds either a direct or indirect interest in taxable property- see RPSM07109120. RPSM07109210 explains the position for direct interests and the following paragraphs explain the position for indirect interests.

Indirect investment in taxable property via genuinely diverse commercial vehicles will not be subject to the tax charges on taxable property. See pages RPSM07109420 to RPSM07109460.

An indirect interest in taxable property will be held through a "vehicle", i.e., a person or entity through whom the pension scheme holds the property. So if a pension scheme holds 100% of the share capital of a company which itself owns residential property then the company through which the pension scheme owns the property is the vehicle.

A person indirectly holds an interest in a vehicle if the person,

• holds an interest in a person who holds an interest in the vehicle, or
• holds an interest in a person who holds the interest in another person who holds the interest in the vehicle and so on down through any length of chain of interests held.

Examples

A pension scheme holds 100% of the shares in company A and company A holds 50% of the shares in company B. The pension scheme indirectly holds an interest in company B of 50% (i.e. 100% x 50%).

A pension scheme holds 20% of the shares in an open ended investment company (OEIC) and the OEIC holds 50% of the shares in company A that holds 40% of the shares in company B. The pension scheme holds an indirect interest in both company A, of 10% (i.e. 20% x 50%), and company B, of 4% (i.e. 20% x 50% x 40%).

An indirect interest in taxable property can be held via a wide variety of types and sizes of vehicles or structures including collective investment schemes, unit trust schemes, unauthorised unit trusts, exempt unauthorised unit trusts, open ended investment companies, closed ended companies, investment trust companies, insurance policies and contracts, trusts, depository interests, or exchange traded funds.

An investment regulated pension scheme holds an interest in taxable property if the scheme holds the interest indirectly. In both of the examples that follow the pension scheme holds an interest in property indirectly.

To determine who holds any asset, an investment regulated pension scheme holds an asset if that asset is held for the purposes of the pension scheme.

An arrangement under a pension scheme holds an asset if that asset is held for the purposes of an arrangement under the pension scheme

A trust which is not a pension scheme holds an asset if that asset is held for the purposes of the trust.

These rules apply to the person/vehicle at each 'level' whether that person holds the relevant interest or property jointly, in common or alone.

Property is held indirectly if the scheme does not hold the interest in the taxable property directly but,

holds an interest in a vehicle that holds the property directly, or

holds an interest in a vehicle that has an interest in another vehicle that holds the property directly.

Examples

A pension scheme holds 100% of the shares in company A and the company owns a residential property. This demonstrates an indirect holding by the pension scheme, of 100%. The pension scheme indirectly holds an interest in the residential property owned by company A.

A pension scheme holds 20% of the shares in an open ended investment company (OEIC) and the OEIC holds 50% of the shares in company A that owns residential property. This demonstrates an indirect holding by the pension scheme, of 10% (i.e. 20% x 50%). The pension scheme therefore is treated as owning a 10% interest in the residential property owned by company A.

An interest in a person is held by another person where they,

• hold an interest, right or power in or over that other person, or
• lend that other person money to fund the acquisition by that other person of taxable property. But certain authorised employer loans are excluded from this provision. *

This is where all the following provisions are satisfied.

a) a trade, profession or vocation carried on by the sponsoring employer, or

b) the sponsoring employer's administration or management.

A person holds an interest in a company if

• the person has, or is entitled to acquire, share capital or voting rights in the company,
• the person has, or is entitled to acquire, a right to receive or participate in distributions of the company,
• the person is entitled to secure that income or assets (whether present or future) of the company will be applied directly or indirectly for the person's benefit, or
• the person, either alone or together with other persons, has control of the company.

In the above paragraph references to a person being entitled to do anything apply where a person,

• is currently entitled to do it at a future date, or
• will at a future date be entitled to do it.

For the purposes of the above control has the meaning given by section 416 Income and Corporation Taxes Act 1988. For further detailed guidance refer to the Company Taxation Manual starting at CTM60200.

A person holds an interest in a collective investment scheme if the person is a participant in the scheme. Collective investment scheme has the meaning given by section 235 Financial Services and Markets Act 2000.

Participant in relation to a scheme has the meaning given in section 235(2) FISMA 2000.

A pension scheme holds an interest in a trust, that is not a unit trust scheme within section 237(1) FISMA 2000, if the following conditions in are met. These are

1. that the pension scheme, a member of the pension scheme or a person connected with such a member has a relevant interest in the trust.
   
   
2. that, since the interest was acquired,

A person other than a pension scheme holds an interest in a trust if,

• the person has the relevant interest in the trust, and
• since the interest was acquired, the person has made a payment to the trust, other than a payment made for purely commercial reasons).

A person has a relevant interest in a trust if,

• any property which may at any time be comprised in the trust, or any derived property) is, or will or may become payable to or applicable for the benefit of the person in any circumstances, or
• the person enjoys a benefit deriving directly or indirectly from any property which is comprised in the trust or any derived property

A payment will be treated as made on purely commercial grounds where,

• payment is made as part of an arm's length transaction by which property or a benefit is to be provided in return for a payment
• and the purpose of the payment is not to provide taxable property for personal use of a pension scheme member or a connected person.

Derived property, in relation to any property, means income from that property or any other property directly or indirectly representing proceeds of, or income from, that property Connected person means as defined in section 839 of the Taxes Acts, see RPSM07103180.

If a pension scheme has a direct or indirect interest in a trust and that trust owns taxable property the pension scheme will have an interest in that taxable property. The amount of that interest will depend upon the terms of the trust.

The pension scheme (or the person through whom the pension scheme has an indirect interest) may have a set interest in property held by the trust and in those circumstances the pension scheme will be deemed to hold property by virtue of that interest.

In other circumstances the holding will be determined by a just and reasonable apportionment depending upon the facts of the case.

Examples

If a pension scheme holds an interest in a trust and that trust will pay out 40% of its income and capital to that pension scheme the pension scheme will be deemed to own 40% of any taxable asset held by the trust.
If a pension scheme holds 40% of the share capital of a company which in turn holds an interest in a trust and that trust will pay out 50% of its income and capital to the company the pension scheme is deemed to hold 20% of any taxable property held by the trust (i.e. 40% x 50%).