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Tax on Unrealised Investment Gains?

Is there Corporation Tax on unrealised gains for company held OEICs and Unit Trusts?

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Hi there. My Ltd company has used some surplus cash to invest in OEICs and Unit Trusts. 

Let's assume they invest £10k and at the end of the financial year the investments have increased in value to £15k. This reflects the £10k investment and the £5k unrealised gain. I understand there has to be a fair value adjustment in the P&L to refelct the increased value of the investment to £15k.

However, it was my understanding that unrealised gains of this nature should be stripped out of the calculation for Corporation Tax. And that Corporation Tax will only become due on gains in the investment value at the point which the investment is sold (i.e. the point which the gain becomes a realised gain).

Our auditors have disagreed with this, saying that Corporation Tax is due on the gain made in each financial year, regardless of whether it is a realised or unrealised gain.

I'd appreciate some guidance on which approach is correct (mine of the auditors) so that i can identify whether this is something i should be raising with the MD of the company. 

Many thanks in advance for your comments  

Replies (13)

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By Accountant A
03rd Jul 2019 16:59

markjp wrote:

Our auditors have disagreed with this,  

Presumably you have asked them why they believe what they said? Statutory references maybe?

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Replying to Accountant A:
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By markjp
03rd Jul 2019 17:08

The response i got was that changes in fair value accounting rules meant that the investment should be fair value adjusted in the P&L (which agree with) and that Corporation Tax will be calculated on the profit figure.

Unfortunately i was not able to speak directly with the auditors at the time, so this was communicated to me via the FD.

So i am interested in learning the opinions of you good people first before i challenge further!

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Replying to markjp:
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By ms998
04th Jul 2019 12:37

CTA 2009 s46(1) follow the accounts subject to any adjustment required or authorised by law in calculating profits.

When you sell the assets you are subject to Corporation tax on the chargeable profits at that time which is an adjustment required. I'll leave it as an exercise for you to find that legislation....

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By andrew1211
08th Jul 2019 14:50

Interesting....I was with you?!

So if you revalue a property you pay tax on the uplift?? I think not....

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Replying to andrew1211:
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By markjp
09th Jul 2019 10:23

Tax treatment on Investment property is treated differently to unit trust/ OEIC investments.

So i am certain there is no CT to pay on unrealised gains in regards to revaluation uplift on investment properties. It was my belief that this was also the case with unit trust/ OEIC investments but the auditor's view appears to differ and i'm struggling to find the answer in straight forward black and white, as all the results i seem to find are in relation to investment property only.

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Replying to markjp:
Psycho
By Wilson Philips
09th Jul 2019 11:28

Please read my comment below - you need to consider the make-up of the unit trusts etc. If they are comprised mainly (>60%) of corporate bonds etc then they are treated as loan relationships, with tax following the accounts.

If on the other hand the investments are predominantly equity-based then accounts should be ignored and tax based on realised gains and losses.

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Replying to Wilson Philips:
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By markjp
09th Jul 2019 13:27

Thank you for this, that is very useful. The unit trusts are indeed equity based predominantly, with a very minor holding in corporate bonds.

Is there any chance you know of any paragraph in legislation etc i can point to which reflects this? So that i can use this as a reference point to back this up?

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Replying to markjp:
Psycho
By Wilson Philips
09th Jul 2019 13:52

Section 490 onwards of CTA 2009.

There is also HMRC guidance at CFM43010 onwards.

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Replying to Wilson Philips:
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By markjp
09th Jul 2019 16:12

Thank you, Very helpful once again

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Psycho
By Wilson Philips
08th Jul 2019 16:23

The auditors may or may not be correct - you need to consider the constituent elements of the unit trusts etc.

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By Duggimon
09th Jul 2019 14:25

Given that the auditors are auditing the accounts, and that you haven't spoken with them directly but via the FD who may or may not have relayed precisely what they said, is it possible that what the auditors want to see is the tax due on the uplift in investments recognised in the accounts, rather than included on the tax return?

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Replying to Duggimon:
Psycho
By Wilson Philips
09th Jul 2019 14:31

Good point

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Replying to Duggimon:
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By markjp
09th Jul 2019 16:13

Wow i hadn't considered that, so thank you for that view. Once I've got my arguments & facts in order i will certainly ask this question as part of my submission.

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