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The Authorised Investment Funds (Tax) Regulations 2006

Type Statutory-Instrument

Publication 2006-03-29

Last updated 2021-12-09

State In force

Department King's Printer of Acts of Parliament

Source legislation.gov.uk

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“tax advantage” has the meaning given by section of 840ZA of ICTA; and

“income tax advantage” has the meaning given by section 683 of ITA 2007.

PART 4B — TAX ELECTED FUNDS

CHAPTER 1 — PRELIMINARY PROVISIONS

Tax Elected Funds

69Z42

(1) This Part makes provision in relation to an authorised investment fund which meets the conditions in regulations 69Z45 to 69Z48.

(2) In these Regulations an authorised investment fund to which this Part applies may be referred to as a “Tax Elected Fund”.

Structure of this Part

69Z43

The structure of this Part is as follows—

this Chapter contains preliminary provisions;

Chapter 2 deals with entry into and membership of the Tax Elected Funds regime;

Chapter 3 deals with the tax treatment of Tax Elected Funds;

Chapter 4 deals with distributions made by Tax Elected Funds;

Chapter 5 deals with the treatment of participants in Tax Elected Funds;

Chapter 6 deals with compliance in relation to the Tax Elected Funds regime; and

Chapter 7 contains provisions relating to an authorised investment fund’s leaving the Tax Elected Funds regime.

Interpretation

69Z44

In this Part—

“entry” means the time when this Part begins to apply to an authorised investment fund;

“cessation” means the time when this Part ceases to apply to an authorised investment fund;

“overseas property business” has the meaning given in section 206 of CTA 2009;

“UK property business” has the meaning given in section 205 of CTA 2009.

CHAPTER 2 — ENTRY INTO AND MEMBERSHIP OF THE TAX ELECTED FUNDS REGIME

Conditions of membership of the Tax Elected Funds regime

Conditions for this Part to apply to fund

69Z45

In order for this Part to apply to an authorised investment fund in respect of an accounting period—

(a) the following conditions (the “TEF conditions”) must be met—

(i) the property condition (see regulation 69Z46);

(ii) the genuine diversity of ownership condition (see regulation 9A);

(iii) the loan creditor condition (see regulation 694Z47); and

(iv) the scheme documentation condition (see regulation 69Z48); and

(b) an application for this Part to apply must be accepted by HM Revenue and Customs (see regulations 69Z49 to 69Z53).

The TEF conditions

The property condition

69Z46

The property condition is that the authorised investment fund does not have a UK property business or an overseas property business.

The loan creditor condition

69Z47

(1) The loan creditor condition is that the authorised investment fund must meet conditions A to C throughout the accounting period in the case of any loan relationship to which the fund is party as a debtor.

(2) Condition A is that, in the case of a debtor relationship of the fund, the person standing in the position of a creditor as respects the debt in question is not entitled to an amount by way of interest which depends to any extent on—

(a) the results of all or part of the authorised investment fund’s business, or

(b) the value of any of the fund’s assets.

(3) For the purposes of condition A, a loan shall not be treated as dependent on the results of the fund’s business by reason only that the terms of the loan provide—

(a) for the interest to be reduced in the event of results improving, or

(b) for the interest to be increased in the event of results deteriorating.

(4) Condition B is that, in the case of a debtor relationship of the fund, the person standing in the position of a creditor as respects the debt in question is not entitled to an amount by way of interest which exceeds a reasonable commercial return on the consideration lent.

(5) Condition C is that, in the case of a debtor relationship of the fund, the person standing in the position of a creditor as respects the debt in question is entitled on repayment to an amount which—

(a) does not exceed the consideration lent, or

(b) is reasonably comparable with the amount generally repayable (in respect of an equal amount of consideration) under the terms of issue of securities listed on a recognised stock exchange.

(6) In this regulation “loan relationship” and “debtor relationship” shall be construed in accordance with Part 5 of CTA 2009 (loan relationships).

The scheme documentation condition

69Z48

The scheme documentation condition is that the instrument constituting the authorised investment fund and its prospectus must include provisions which require the fund to meet the property condition and the loan creditor condition on entry and throughout the accounting period.

Application for this Part to apply

Application process

69Z49

(1) An application for this Part to apply to an authorised investment fund may be made by—

(a) the manager of an existing authorised investment fund, or

(b) if it is proposed to establish an authorised investment fund, the person expected to become the manager of the fund once established (the “applicant”).

(2) Before making an application in relation to an existing authorised investment fund, the fund must obtain any necessary shareholder or unit holder approval and must have applied for any necessary regulatory approval in respect of the instrument constituting the fund and the prospectus.

(3) The manager or applicant must notify HM Revenue and Customs when any necessary regulatory authorisation has been given.

(4) Where in relation to an existing authorised investment fund this Part has previously applied to the fund—

(a) no application may be made if a termination notice was issued in relation to the fund, or

(b) if an election was made under regulation 69Z70 that this Part should cease to apply, no application can be made in relation to any accounting period which begins within six years of the cessation.

(5) In this Part—

“applicant” means the person referred to in paragraph (1)(b);

“application” means an application under this regulation;

“existing fund application” means an application made under paragraph (1)(a); and

“future fund application” means an application made under paragraph (1)(b).

Form and timing of application under regulation 69Z49

69Z50

(1) An application must be made in writing to the Commissioners.

(2) An existing fund application must be received by HM Revenue and Customs at least 28 days before the beginning of the specified accounting period (see regulation 69Z51(2)).

This is subject to paragraph (8).

(3) A future fund application must be received by HM Revenue and Customs at least 42 days before the date the fund is expected to be established and authorisation given.

This is subject to paragraph (9).

(4) Within a period of 28 days (or 14 days in the case of an application within paragraph (8) or (9)) beginning on the day on which the application is received, HM Revenue and Customs must—

(a) notify the manager or applicant that the application is accepted, or

(b) issue a refusal notice.

(5) An application may be withdrawn or amended at any time before it is accepted—

(a) by the manager (in the case of an existing fund application), or

(b) by the applicant (in the case of a future fund application).

(6) If an application is amended before it is accepted, regulation 69Z49 shall apply to the amended application.

(7) But if HM Revenue and Customs give notice that they are satisfied that the amended application is valid, the amended application shall take effect as if made on the date of the original application.

(8) An existing fund application may be received by HM Revenue and Customs at least 14 days before the beginning of the specified accounting period if—

(a) HM Revenue and Customs have given clearance under regulation 9B, and

(b) the manager of the authorised investment fund certifies that there have been no changes in substance between—

(i) the form in which the instrument constituting the fund and its prospectus were considered by HM Revenue and Customs before giving the clearance, and

(ii) the form in which it is proposed that those documents will apply at the beginning of the specified accounting period.

(9) A future fund application may be received by HM Revenue and Customs at least 14 days before the proposed fund is authorised and established if—

(a) HM Revenue and Customs have given clearance under regulation 9B, and

(b) the applicant certifies that there have been no changes in substance between—

(i) the form in which the instrument constituting the fund and its prospectus were considered by HM Revenue and Customs before giving the clearance, and

(ii) the form in which it is proposed that those documents will apply at the time when the proposed fund is authorised.

Contents of application under regulation 69Z49

69Z51

(1) An application must include the following information.

(2) An existing fund application must specify the accounting period from the beginning of which the application seeks to apply this Part to the fund (the “specified accounting period”).

(3) An existing fund application must be accompanied by—

(a) a statement by the manager of the authorised investment fund that the TEF conditions are reasonably expected to be met in respect of the fund throughout the specified accounting period;

(b) the following documents relating to the fund—

(i) the instrument constituting the fund, and

(ii) its prospectus;

(c) a statement by the manager as to whether or not this Part has previously applied to the fund and where this Part has previously applied that statement must include—

(i) the dates of entry and cessation, and

(ii) a statement by the manager that a termination notice has never been issued in respect of the fund;

(d) a statement by the manager that either—

(i) shareholder or unit holder consent to the application is not required, or

(ii) shareholder or unit holder consent has been given, in which case the statement must specify the date of the shareholder or unit holder resolution giving consent;

(e) a copy of the application to the appropriate regulator for approval for any changes in the instrument constituting the fund and its prospectus; and

(f) copies of any documents accompanying the application mentioned in sub-paragraph (e) to the extent that those documents do not fall within sub-paragraphs (a) to (d).

(4) A future fund application must specify the date it is expected the fund will be established and authorisation given and seek to apply this Part to the proposed fund from that date.

(5) A future fund application must be accompanied by—

(a) a statement by the applicant that the TEF conditions are reasonably expected to be met in respect of the proposed fund throughout its first accounting period;

(b) the following documents relating to the proposed fund—

(i) the proposed instrument constituting the fund, and

(ii) its ... prospectus ... ;

(c) a copy of the application to the appropriate regulator for authorisation of the proposed fund as an authorised investment fund; and

(d) copies of any documents accompanying the application mentioned in sub-paragraph (c) to the extent that those documents do not fall within sub-paragraphs (a) and (b).

Procedural matters relating to the making of applications for this Part to apply

Refusing an application: refusal notice

69Z52

(1) If any of conditions A to C are met HM Revenue and Customs must refuse the application and give a notice (a “refusal notice”)—

(a) to the manager of the authorised investment fund if an existing fund application has been made, or

(b) to the applicant if a future fund application has been made.

(2) Condition A is that—

(a) the documents supplied do not demonstrate that the authorised investment fund (or the proposed authorised investment fund) will meet all the TEF conditions, or

(b) the statement given in accordance with regulation 69Z51(3)(a) or (5)(a) does not demonstrate that the fund (or proposed fund) can reasonably be expected to meet all the TEF conditions throughout the specified accounting period or the first accounting period.

(3) Condition B is that the application is not accompanied by the documents and statements specified in regulation 69Z51(3) in the case of an existing fund application or regulation 69Z51(5) in the case of a future fund application.

(4) Condition C is that any necessary shareholder, unit holder or regulatory authorisation or approval has not been given.

(5) A refusal notice must specify the reason for refusing the application.

Appeal against refusal notice

69Z53

(1) A person to whom a refusal notice is given may appeal.

(2) The notice of appeal must be given to HM Revenue and Customs within a period of 28 days beginning with the day on which the refusal notice is given.

(3) On an appeal that is notified to the tribunal, the tribunal shall determine whether it was just and reasonable for HM Revenue and Customs to give the refusal notice.

(4) If the tribunal allow the appeal—

(a) they may direct that this Part shall apply to the authorised investment fund (or, as the case may be, to the proposed authorised investment fund), and

(b) they may specify the date from which this Part shall so apply.

(5) The date mentioned in paragraph (4)(b)—

(a) must not be earlier than the beginning of the specified accounting period if an existing fund application has been made, and

(b) must not be earlier than the date of authorisation by the appropriate regulator if a future fund application has been made.

Consequences of entry

Effects of entry

69Z54

On entry a new distribution period of the authorised investment fund shall begin.

Duration

69Z55

Once this Part has begun to apply to an authorised investment fund it shall continue to apply unless and until it ceases to apply in accordance with Chapter 7 of this Part.

CHAPTER 3 — THE TAX TREATMENT OF TAX ELECTED FUNDS

Components of income

69Z56

(1) For the purposes of corporation tax, the income arising to a Tax Elected Fund consists of—

(a) dividend income;

(b) property investment income, being—

(i) distributions of profits of C (tax-exempt) in relation to shares held in a UK-REIT, and

(ii) property income distributions in relation to shares held in a Property AIF;

(i) profits of a UK property business that are not within sub-paragraph (b), and

(ii) income from an overseas property business; and

(d) other income.

(2) In this regulation, “C (tax-exempt)” shall be construed in accordance with Part 4 of FA 2006.

Treatment of property investment income

69Z57

(1) Section 7(2) of ICTA (treatment of certain payments and repayments of income tax: set off of tax) shall not apply to payments of property investment income.

(2) Property investment income arising to a Tax Elected Fund shall be treated for the purposes of the Tax Acts as a distribution that is exempt for the purposes of Part 9A of CTA 2009 (company distributions) but shall not be treated as franked investment income.

Treatment of distributions

69Z58

Section 931R of CTA 2009 (election that distribution should not be exempt) shall not apply in relation to distributions received by a Tax Elected Fund.

CHAPTER 4 — DISTRIBUTIONS MADE BY TAX ELECTED FUNDS

Attribution of distributions

69Z59

(1) The total amount available for income allocation in a Tax Elected Fund shall be attributed as follows.

(2) There shall be attributed to TEF distributions (dividends)—

(a) dividend income,

(b) property investment income, and

(3) Other income shall be attributed to TEF distributions (non-dividend).

TEF distributions (dividends)

69Z60

(1) This regulation applies if—

(a) a Tax Elected Fund makes a distribution, and

(b) the amount distributed includes sums attributed to TEF distributions (dividends).

(2) The Tax Acts shall have effect as if the sums were dividends on shares paid on the distribution date by the fund to the participants in proportion to their rights.

(3) In this Part a “TEF distribution (dividend)” means a sum attributed to TEF distributions (dividends) which is distributed (including a dividend treated as paid to a participant who is not chargeable to corporation tax).

(4) This regulation is subject to regulation 23 (treatment of de minimis amounts).

TEF distributions (non-dividend)

69Z61

(1) This regulation applies if—

(a) a Tax Elected Fund makes a distribution, and

(b) the amount distributed includes sums attributed to TEF distributions (non-dividend).

(2) The Tax Acts shall have effect as if the sums were payments of yearly interest made on the distribution date by the fund to the participants in proportion to their rights.

(2A) For the purposes of Part 10 (Corporate Interest Restriction) of TIOPA 2010, a TEF distribution (non-dividend) is treated as not being a tax-interest expense amount of the Tax Elected Fund.

(3) In these Regulations a “TEF distribution (non-dividend)” means a sum attributed to TEF distributions (non-dividend) which is distributed (including a payment made to a participant who is not chargeable to income tax).

(4) This regulation is subject to regulation 23 (treatment of de minimis amounts).

CHAPTER 5 — THE TREATMENT OF PARTICIPANTS IN TAX ELECTED FUNDS

TEF distribution (dividend)

Participants chargeable to corporation tax

69Z62

(1) If a TEF distribution (dividend) is made for a distribution period to a participant within the charge to corporation tax, regulations 48 to 52A (dividend distributions) shall apply with the modifications specified in paragraph (2).

(2) The specified modifications are—

(a) for “dividend distribution” in each place it occurs there shall be substituted “TEF distribution (dividend)”;

(b) in regulation 50 (references to gross income) for “the net revenue before taxation shall be determined in accordance with the Statement of Recommended Practice” there shall be substituted “the amount attributed to TEF distributions (dividends) in accordance with regulation 69Z59 (allocation of income);”.

(d) for “the authorised investment fund” in each place it occurs there shall be substituted “the Tax Elected Fund”.

TEF distributions (non-dividend)

Obligation to deduct tax from TEF distributions (non-dividend)

69Z63

(1) If a TEF distribution (non-dividend) is made for a distribution period to a participant within the charge to income tax, regulations 26 to 33 (deduction of tax from interest distributions: general) shall apply with the modification specified in paragraph (3).

(2) If a TEF distribution (non-dividend) is made for a distribution period to a participant within the charge to corporation tax, regulation 47 (the obligation to deduct tax) shall apply with the modification specified in paragraph (3).

(3) The modification specified is that for “interest distribution” in each place it occurs there shall be substituted “TEF distribution (non-dividend)”.

Modification of section 490 of CTA 2009

69Z64

Section 490 of CTA 2009 (holdings in OEICs, unit trusts and offshore funds treated as creditor relationship rights) shall apply to a participant in a TEF as if in subsections (4) and (5) for “interest distribution” there were substituted “TEF distribution (non-dividend)”.

CHAPTER 6 — COMPLIANCE IN RELATION TO THE TAX ELECTED FUNDS REGIME

Breaches of TEF conditions

Breach of conditions: general

69Z65

(1) This regulation applies if a Tax Elected Fund—

(a) does not meet one of the TEF conditions, and

(b) becomes aware that it does not meet the condition.

(2) Within 28 days of becoming aware of the breach, the fund must provide the following information to the Commissioners—

(a) the date on which the condition first ceased to be met;

(b) the date on which the fund became aware of the breach;

(d) the nature of the breach;

(e) the steps the fund proposes to take to rectify the breach;

(f) the date by which the fund proposes to rectify the breach; and

(g) where there has been a previous breach of the TEF conditions, details of the condition that was breached on that occasion, the date of that breach and the date that breach was rectified.

(3) The date referred to in paragraph (2)(f) must be the earliest date by which the objective of complying with the relevant condition may reasonably be achieved.

(4) The Commissioners must give a termination notice to the fund if—

(a) the steps that the fund proposes to take will not rectify the breach;

(b) the date by which the fund proposes to rectify the breach is not the earliest date by which the objective of remedying the relevant condition may reasonably be achieved;

(d) there are three breaches of the same TEF condition in a period of ten years beginning with the first day of the accounting period in which the fund becomes aware of the first of those breaches.

Breach of the property condition, genuine diversity of ownership condition or scheme documentation condition

69Z66

(1) This regulation applies if a Tax Elected Fund is in breach of the property condition, genuine diversity of ownership condition or scheme documentation condition.

(2) If the fund is inadvertently in breach but rectifies the breach within a reasonable time of the fund becoming aware of the breach, this Part shall continue to apply to the fund despite the breach (but see regulations 69Z65(4)(d) and 69Z68).

(3) If the fund is inadvertently in breach but does not rectify the breach within a reasonable time of the fund first becoming aware of the breach, the Commissioners must give a termination notice to the fund.

Breach of the loan creditor condition

69Z67

(1) This regulation applies if a Tax Elected Fund is in breach of the loan creditor condition.

(2) If the fund is inadvertently in breach but rectifies the breach within a period of 28 days beginning with the day on which the fund first becomes aware of the breach, this Part shall continue to apply to the fund despite the breach (but see paragraph (4) and regulations 69Z65(4)(d) and 69Z68).

(3) If the fund is inadvertently in breach but does not rectify the breach within a period of 28 days beginning with the day on which the fund first becomes aware of the breach, the Commissioners must give a termination notice to the fund.

(4) If the fund is in breach of the same condition specified in paragraphs (2) to (5) of regulation 69Z47 in two different accounting periods in a period of ten years beginning with the first day of the accounting period in which the fund becomes aware of the first of those breaches, the Commissioners must give a termination notice to the fund.

Multiple breaches of separate conditions

69Z68

The Commissioners must give a termination notice to a Tax Elected Fund if—

(a) there has been a breach of at least two of the TEF conditions, and

(b) there have been four breaches in a period of ten years beginning with the first day of the accounting period in which the first breach occurs.

Information about possible breaches of the TEF conditions

Information to be provided to officers of Revenue and Customs

69Z69

(1) This regulation applies if an officer of Revenue and Customs thinks that a Tax Elected Fund—

(a) does not meet, or may not meet, one of the TEF conditions, or

(b) has not rectified a breach of such a condition.

(2) The officer may serve a notice (an “information notice”) on the manager of the fund requiring the manager to provide any of the information specified in regulation 69Z65(2) within a specified period.

(4) If the manager does not comply with the information notice within the specified period the Commissioners must give a termination notice.

(5) In this regulation the specified period is a period of 28 days beginning with the day on which the notice is served or, on an application by the manager, such longer period as the officer of Revenue and Customs thinks is reasonable.

CHAPTER 7 — LEAVING THE TAX ELECTED FUNDS REGIME

Termination by election: authorised investment fund

69Z70

(1) This regulation applies if a Tax Elected Fund gives a notice under this regulation electing that this Part is to cease to apply to the fund at the end of a specified accounting period.

(2) This Part shall cease to apply to the fund at the end of that accounting period.

(3) A notice under paragraph (1) must—

(a) be given in writing to the Commissioners,

(b) be given before the end of the accounting period specified in paragraph (1), and

Termination by notice: Commissioners

69Z71

(1) This regulation applies if the Commissioners give a notice in writing under this paragraph to a Tax Elected Fund (a “termination notice”).

(2) This Part shall cease to apply to the fund.

(3) The Commissioners may give a termination notice only if a provision contained in this Part provides that the Commissioners must give a termination notice.

(4) A termination notice must state the reason for it.

(5) If a termination notice is given to an authorised investment fund, this Part shall be taken to have ceased to apply to the fund at the end of the accounting period immediately preceding the accounting period in which the notice was given.

(6) But regulations 13 (treatment of interest distributions for the purpose of loan relationships), 69Z61 (TEF distributions (non-dividend)) and 69Z63 (obligation to deduct tax from TEF distributions (non-dividend)) shall apply in relation to any TEF distribution (non-dividend) made before the notice was given.

Appeal against termination notice

69Z72

(1) An authorised investment fund to which a termination notice is given may appeal.

(2) The notice of appeal must be given to HM Revenue and Customs within a period of 28 days beginning with the day on which the termination notice is given.

(3) On an appeal that is notified to the tribunal, the tribunal shall determine whether it was just and reasonable for HM Revenue and Customs to give the termination notice.

(4) If they decide that it was, they must confirm the notice.

(5) If they decide that it was not, they must set aside the notice.

Mergers

69Z73

(1) This regulation applies if a Tax Elected Fund—

(a) is party to a merger or takeover, and

(b) as a result, ceases to meet one or more of the TEF conditions.

(2) On the occurrence of the merger or takeover—

(a) an accounting period of the fund shall end at the end of the date of the merger or takeover, and

(b) this Part shall cease to apply to the fund at the end of that date.

Notification of interest distributions and TEF distributions (non-dividend) made without deduction of tax

Allocation of income

PART 6A — FUNDS INVESTING IN NON-REPORTING OFFSHORE FUNDS

CHAPTER 1 — Preliminary Provisions

FINROFs

85A

(1) This Part applies to—

(a) an authorised investment fund which meets the investment condition in regulation 85D (the investment condition);

(b) an authorised investment fund in respect of which an election has been made in accordance with regulation 85F (elective FINROFs);

(d) a participant in a fund which has left the FINROF regime, where the participant has not made a valid election under regulation 85Z11 (participant’s power to elect for deemed disposal).

(2) A fund to which this Part applies shall be known as a Fund Investing in Non-Reporting Offshore Funds (“FINROF”).

Structure of this Part

85B

The structure of this Part is as follows—

This Chapter contains preliminary provisions;

Chapter 2 deals with entry into the Funds Investing in Non-Reporting Offshore Funds regime (“FINROF regime”);

Chapter 3 deals with the tax treatment of FINROFs and of participants in FINROFs;

Chapter 4 deals with exceptions, etc from the charge to tax;

Chapter 5 deals with disposal of units in FINROFs;

Chapter 6 deals with income gains and computation of income gains;

Chapter 7 deals with deduction of income gains in computing chargeable gains;

Chapter 8 deals with leaving the FINROF regime.

Interpretation

85C

In this Part—

“gross asset value” means the value of the investments comprising the scheme property of the authorised investment fund before the deduction of specified liabilities, but does not include cash awaiting investment;

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The investment condition

85D

(1) The investment condition is met in relation to an authorised investment fund if the total amount invested in non-reporting funds or FINROFs is more than 50% of the gross asset value of the authorised investment fund.

(2) This regulation is subject to regulation 85E.

Interests in funds treated as not being interests in non-reporting funds

85E

(1) For the purposes of regulation 85D(1) the interests specified in paragraph (2) shall not be regarded as interests in non-reporting funds.

(2) The interests specified are—

(a) any interest in an offshore fund in respect of which, by virtue of regulation 29 or 30 of the Offshore Funds Regulations, no liability to tax would arise under regulation 17 of those Regulations on a disposal of that interest; and

(b) any interest of an authorised investment fund in a non-reporting fund which meets the conditions in regulation 14ZA(2).

Elective FINROFs

85F

(1) An authorised investment fund which does not meet the investment condition may elect to be treated as a FINROF (an “elective FINROF”).

CHAPTER 2 — Entry into Funds Investing in Non-Reporting Offshore Fund (“FINROF”) regime

Entry into FINROF regime: the basic rule

85G

This Part applies to an authorised investment fund from—

(a) the date on which the fund first met the condition in regulation 85D (the investment condition); or

(b) the date specified in the notice given under regulation 85F (elective FINROFs),

whichever is the earlier.

The requirement to notify where regulation 85D is satisfied

85H

(1) The legal owner of an authorised investment fund which is a FINROF by virtue of regulation 85D must notify HM Revenue and Customs of the date on which the fund first met the investment condition within a period of 3 months beginning with the date on which the fund first met that condition.

(2) For the purposes of paragraph (1), no account shall be taken of the period before the date of any previous valid election under regulation 85Z9 (leaving the FINROF regime).

(3) An authorised investment fund that fails to comply with this regulation is liable to a penalty not exceeding £3,000 determined in accordance with section 100 of TMA 1970.

(4) Sections 100A, 100B, 102, 103(4) and 118(2) of TMA 1970 apply to a penalty determined in accordance with paragraph (3).

(5) This regulation is subject to regulation 85J (inadvertent fulfilment of investment condition).

The requirement to notify participants when a fund enters the FINROF regime

85I

(1) The legal owner must notify the participants in a fund that the fund has entered the FINROF regime and inform them that any gains made on the disposal of units in the fund shall be treated as an income gain rather than a capital gain, in accordance with Chapter 3 of this Part.

(2) The notification under paragraph (1) must be given within a period of 3 months beginning with the date on which this Part first applied to the fund.

(3) For the purposes of paragraph (2), no account shall be taken of the period before the date of any previous valid election under regulation 85Z9 (leaving the FINROF regime).

(4) An authorised investment fund that fails to comply with this regulation is liable to a penalty not exceeding £3,000 determined in accordance with section 100 of TMA 1970.

(5) Sections 100A, 100B, 102, 103(4) and 118(2) of TMA 1970 apply to a penalty determined in accordance with paragraph (4).

(6) This regulation is subject to regulation 85J.

Inadvertent fulfilment of investment condition

85J

(1) If this regulation applies a fund shall be treated as if it had never met the investment condition and consequently none of the provisions of this Part (including the penalty provisions in regulations 85H and 85I) apply to the fund.

(2) This regulation applies where—

(a) an authorised investment fund meets the investment condition but as soon as possible after becoming aware that the condition is met, the legal owner gives notice in writing to HM Revenue and Customs of the steps that the fund has taken, or proposes to take, to ensure that the fund no longer meets that condition,

(b) the fund ceases the meet the investment condition before the end of a 4 month period beginning with the date that the fund first met the condition and the legal owner gives notice in writing to HM Revenue and Customs that the fund no longer meets the condition, and

(3) HM Revenue and Customs must, within a period of 28 days beginning with the date on which they receive notice from the legal owner that the fund no longer meets the investment condition, issue a notice in writing to the legal owner that—

(a) this regulation applies, or

(b) this regulation does not apply as HM Revenue and Customs are not satisfied that the conditions in sub-paragraphs (a) and (b) of paragraph (2) are met for the reasons specified in the notice.

Appeal against refusal to provide written notice

85K

(1) A legal owner to whom a notice is issued under paragraph (3)(b) of regulation 85J (a “refusal notice”) may appeal.

(2) The notice of appeal must be given to HM Revenue and Customs within a period of 28 days beginning with the day on which HM Revenue and Customs issued the refusal notice.

(3) On an appeal that is notified to the tribunal, the tribunal shall determine whether it was just and reasonable for HM Revenue and Customs to issue the refusal notice.

(4) If the tribunal determine that it was just and reasonable for HM Revenue and Customs to issue the refusal notice, this Part applies to the fund from the date on which it first met the investment condition and the legal owner must notify the participants in the fund in accordance with regulation 85I.

(5) If the tribunal determine that it was not just and reasonable for HM Revenue and Customs to issue the refusal notice, paragraph (1) of regulation 85J shall apply.

Disposal of an interest in an authorised investment fund prior to its becoming a FINROF

85L

(1) This regulation applies if an authorised investment fund either meets the investment condition or becomes an elective FINROF in accordance with regulation 85F.

(2) A participant in the fund may make an election to be treated for the purposes of TCGA 1992—

(a) as disposing of all the units that they hold in the authorised investment fund on the deemed disposal date, and

(b) as immediately upon that disposal, acquiring units in the FINROF.

(3) The disposal referred to in paragraph (2)(a) is treated as made for a consideration equal to the market value of the participant’s holding of units in the fund on the deemed disposal date.

(4) The acquisition referred to in paragraph (2)(b) is treated as made for a consideration equal to the consideration for the disposal referred to in paragraph (2)(a).

(5) If the participant is chargeable to income tax, the election mentioned in paragraph (2) must be made by being included in a return made for the tax year which includes the deemed disposal date.

(6) If the participant is chargeable to corporation tax, the election mentioned in paragraph (2) must be made by being included in the participant’s company tax return for the accounting period which includes the deemed disposal date.

(7) In this regulation—

(a) “company tax return” has the same meaning as in Schedule 18 to the Finance Act 1998, and

(b) “deemed disposal date” means the date on which this Part begins to apply to the authorised investment fund.

CHAPTER 3 — Tax treatment of FINROFs and of participants in FINROFs

The charge to tax

The charge to tax: general provisions

85M

(1) There is a charge to tax if—

(a) a person disposes of an asset,

(b) either condition A or condition B is met, and

(2) Condition A is that the asset consists of units in a FINROF at the time of the disposal.

(3) Condition B is that—

(a) the asset consists of units in an authorised investment fund that had been a FINROF for some of the material period; and

(b) no valid election under regulation 85Z11 (participant’s power to elect for deemed disposal) was made in relation to the asset.

(4) In paragraph (3) “the material period” means a period beginning with the date of acquisition of the asset and ending with the date of the disposal.

The charge to tax: further provisions

85N

(1) The income gain arising is treated for all purposes of the Tax Acts as income which arises at the time of the disposal to the person making the disposal (or treated as making the disposal).

(2) The tax is charged on the person making the disposal (or treated as making the disposal).

(3) In the case of a person chargeable to income tax, tax is charged under Chapter 8 of Part 5 of ITTOIA 2005 (miscellaneous income: income not otherwise charged) for the year of assessment in which the disposal is made, but sections 688(1) (income charged) and 689 (person liable) of ITTOIA 2005 do not apply.

(4) In the case of a person chargeable to corporation tax, tax is charged under Chapter 8 of Part 10 of CTA 2009 (miscellaneous income: income not otherwise charged) for the accounting period in which the disposal is made.

Application of certain provisions of TCGA 1992

85O

The following enactments have effect in relation to income tax or corporation tax in respect of income gains as they have effect in relation to capital gains tax or corporation tax in respect of chargeable gains—

(a) section 2(1) of TCGA 1992 (persons chargeable to capital gains tax);

(b) section 10 of TCGA 1992 (non-resident with a United Kingdom branch or agency);

Application of section 10A of TCGA 1992

85P

(1) Section 10A of TCGA 1992 (temporary non-residence) applies for the purposes of this Part with the following modifications.

(2) The section applies as if, in subsection (2)—

(a) the reference to section 86A were omitted;

(b) for the reference to capital gains tax there were substituted a reference to income tax;

(c) in paragraph (a), for the reference to chargeable gains and losses there were substituted a reference to income gains;

(d) paragraphs (b) and (c) were omitted; and

(e) for the references to gains or losses there were substituted a reference to income gains.

(3) The section applies as if, in subsection (3)—

(a) for the reference to gains and losses there were substituted a reference to income gains; and

(b) for the reference to any gain or loss there were substituted a reference to any income gains.

(4) The section applies as if subsection (4) were omitted.

(5) The section applies as if, in subsection (5)—

(a) for the reference to gains and losses there were substituted a reference to income gains;

(b) for the reference to any chargeable gain or allowable loss there were substituted a reference to any income gain; and

(c) for the reference to section 10 or 16(3) there were substituted a reference to regulation 85O(b) (application of certain provisions of TCGA).

(6) The section applies as if subsection (6) were omitted.

(7) The section applies as if, in subsection (7), for the reference to capital gains tax there were substituted a reference to income tax.

(8) The section applies as if, in subsection (9C)—

(a) for the reference to capital gains tax there were substituted a reference to income tax; and

(b) for the reference to chargeable gains there were substituted a reference to income gains.

CHAPTER 4 — Exceptions, etc from the charge to tax

Exceptions from the charge to tax

85Q

(1) No liability to tax arises under regulation 85M (the charge to tax: general provisions) if condition A or B is met.

(2) Condition A is that the participant is required to treat units in the FINROF as a loan relationship to which the provisions of Chapter 3 of Part 6 of CTA 2009 apply.

(3) Condition B is that the participant is required to treat units in the FINROF as a derivative contract to which the provisions of Part 7 of CTA 2009 apply.

Trading stock etc.

85R

(1) No liability to tax arises under regulation 85M if condition A or B is met.

(2) Condition A is that the units in the fund are held as trading stock.

(3) Condition B is that the disposal of the units is taken into account in computing the profits of a trade.

Long-term insurance funds of insurance companies

85S

(1) No liability to tax arises under regulation 85M in respect of disposals of units of an insurance company’s long-term insurance fund.

(2) In paragraph (1) “insurance company” and “long-term insurance fund” have the same meaning as in section 431(2) of ICTA.

Charitable companies and charitable trusts

85T

(1) A charitable company shall be exempt from corporation tax in respect of an income gain if the gain is applicable and is applied for charitable purposes.

(2) A charitable trust shall be exempt from income tax in respect of an income gain if the gain is applicable and is applied for charitable purposes.

(3) Paragraphs (4) and (5) apply if—

(a) property held on charitable trusts ceases to be subject to charitable trusts, and

(b) that property represents directly or indirectly an income gain.

(4) The trustees are treated as if they had disposed of and immediately reacquired that property for a consideration equal to its market value.

(5) An income gain accruing on the disposal arising under paragraph (4) is treated as an income gain not accruing to a charity.

(6) In this regulation “charity” and “charitable company” have the same meaning as in section 506 of ICTA.

CHAPTER 5 — Disposal of units in FINROFs

Application of this Chapter

85U

This Chapter applies if a participant disposes of an asset and at the time of the disposal—

(a) the asset consists of units in a FINROF, or

(b) the asset consists of units in an authorised investment fund that is not a FINROF and the requirements specified in paragraph (3) of regulation 85M are met.

Disposal of an asset: the basic rule

85V

(1) There is a disposal of an asset for the purposes of this Part if there would be a disposal of an asset for the purposes of TCGA 1992.

(2) Paragraph (1) is subject to the following regulations in this Chapter.

Provisions applicable on death

85W

(1) Notwithstanding anything in paragraph (b) of subsection (1) of section 62 of TCGA 1992 (general provisions applicable on death: no deemed disposal by the deceased), where a person dies and the assets of which the deceased was competent to dispose at the time of death include units in a FINROF, then, for the purposes of these Regulations—

(a) immediately before the acquisition referred to in paragraph (a) of that subsection, those units shall be deemed to be disposed of by the deceased for such a consideration as is mentioned in that subsection; but

(b) nothing in this regulation affects the determination, in accordance with regulation 85U, of the question whether that deemed disposal is one to which this Chapter applies.

(2) Subject to paragraph (1), section 62 of TCGA 1992 applies for the purposes of these Regulations as it applies for the purposes of that Act, and the reference in that paragraph to the assets of which a deceased person was competent to dispose are to be construed in accordance with subsection (10) of that section.

Application of section 135 of TCGA 1992

85X

(1) Section 135 of TCGA 1992 (exchange of securities for those in another company treated as not involving a disposal) does not apply for the purposes of this Part to the extent that—

(a) the interest in the entity that is company A for the purposes of that section that is exchanged is units in a FINROF, and

(b) the interest in the entity that is company B for those purposes that is exchanged is not units in such a fund.

(2) In a case where section 135 of TCGA 1992 would apply apart from paragraph (1), the exchange in question shall for the purposes of this Part constitute a disposal of units in the FINROF for a consideration equal to their market value at the time of the exchange.

Application of section 136 of TCGA 1992

85Y

(1) Section 136 of TCGA 1992 (scheme of reconstruction involving issue of securities treated as exchange not involving disposal) does not apply for the purposes of this Part to the extent that—

(a) the interest in the entity that is company A for the purposes of that section that is exchanged is units in a FINROF, and

(b) the interest in the entity that is company B for those purposes that is exchanged is not units in such a fund.

(2) In a case where section 136 of TCGA 1992 would apply apart from paragraph (1), the deemed exchange in question shall for the purposes of this Part constitute a disposal of units in the FINROF for a consideration equal to their market value at the time of the deemed exchange.

CHAPTER 6 — Income gains and computation of income gains

General provisions

85Z

(1) An income gain arises to a person on the disposal of an asset if a basic gain arises on the disposal.

(2) The disposal gives rise to an income gain of an amount equal to the basic gain on the disposal.

(3) The following provisions of this Chapter explain how the basic gain is computed.

The basic gain and its computation

85Z1

(1) In the case of a participant chargeable to income tax, the basic gain is a gain of the amount which would be the gain on that disposal for the purposes of TCGA 1992 if the gain were computed without regard to any charge to income tax arising under this Part.

(2) In the case of a participant chargeable to corporation tax, the basic gain is a gain of the amount which would be the gain on that disposal for the purposes of TCGA 1992 if the gain were computed—

(a) without regard to any charge to corporation tax arising under this Part, and

(b) without regard to any indexation allowance on the disposal under TCGA 1992.

(3) The computation of the basic gain is subject to—

(a) regulation 85W (provisions applicable on death);

(b) regulation 85X (application of section 135 of TCGA 1992);

(d) regulation 85Z2 (earlier disposal to which the no gain/no loss basis applies);

(e) regulation 85Z3 (modifications of TCGA 1992); and

(f) regulation 85Z4 (losses).

Earlier disposal to which the no gain/no loss basis applies

85Z2

(1) This regulation applies if—

(a) a participant is chargeable to corporation tax, and

(b) the amount of any chargeable gain or allowable loss which would arise on the disposal would fall to be computed in a way which, in whole or in part, would take account of the indexation allowance on an earlier disposal to which section 56(2) of TCGA 1992 (disposals on a no gain/no loss basis) applies.

(2) The basic gain on the disposal is computed as if—

(a) no indexation allowance had been available on any such earlier disposal, and

(b) subject to that, neither a gain nor a loss had arisen to the person making such an earlier disposal.

Modifications of TCGA 1992

85Z3

(1) If the disposal forms part of a transfer to which section 162 of TCGA 1992 (roll-over relief on transfer of business) applies, the basic gain arising on the disposal is computed without regard to any deduction which falls to be made under that section in computing a chargeable gain.

(2) If the disposal is made otherwise than under a bargain at arm’s length and a claim for relief is made in respect of that disposal under section 165 or 260 of TCGA 1992 (relief for gifts), the claim does not affect the computation of the basic gain arising on the disposal.

Losses

85Z4

(1) If the effect of any computation under regulations 85Z1 to 85Z3 would be to produce a loss, the basic gain on the disposal is nil.

(2) Paragraph (1) applies notwithstanding section 16 of TCGA 1992 (losses determined in like manner as gains).

(3) Accordingly, for the purposes of these Regulations, no loss is to be treated as arising on the disposal.

CHAPTER 7 — Deduction of income gains in computing chargeable gains

Scope of this Chapter

85Z5

(1) This Chapter applies if—

(a) a disposal gives rise to an income gain, and

(b) that disposal also constitutes the disposal of the units concerned for the purposes of TCGA 1992.

(2) In this Chapter, the disposal specified in paragraph (1)(b) is called the “TCGA disposal”.

Treatment of the TCGA disposal: general rules

85Z6

(1) This regulation applies for the purposes of the computation of the chargeable gain arising on the TCGA disposal.

(2) The provisions of this regulation have effect in relation to the TCGA disposal in substitution for section 37(1) of TCGA 1992 (deduction of consideration chargeable to tax on income).

(3) In the computation of the gain arising on the TCGA disposal, a sum equal to the income gain shall be deducted from the sum which would otherwise constitute the amount or value of the consideration for the disposal.

(4) Paragraph (3) is subject to the following provisions of this Chapter.

(5) Paragraph (6) applies if the TCGA disposal is of such a nature that, by virtue of section 42 of TCGA (part disposal), an apportionment falls to be made of certain expenditure.

(6) No deduction is to be made by virtue of paragraph (3) in determining the amount or value of the consideration for the purpose of the fraction in section 42(2) of TCGA 1992.

Modification of section 162 TCGA 1992

85Z7

(1) This regulation applies if the TCGA disposal forms part of a transfer to which section 162 of TCGA applies (roll-over relief on transfer of business in exchange wholly or partly for shares).

(2) For the purposes of subsection (4) of section 162 of TCGA 1992 (determination of the amount of the deduction from the gain on the old assets) “B” in the fraction in that subsection (the value of the whole of the consideration received by the transferor in exchange for the business) is to be taken to be what it would be if the value of the consideration other than shares so received by the transferor were reduced by an amount equal to the income gain.

Application of section 128 of TCGA 1992

85Z8

(1) This regulation applies if there is a disposal to which this Part applies by virtue of—

(a) regulation 85X (application of section 135 of TCGA 1992), and

(b) regulation 85Y (application of section 136 of TCGA 1992).

(2) TCGA 1992 has effect as if an amount equal to the income gain to which that disposal gives rise were given (by the person making the exchange) as consideration for the new holding (within the meaning of section 128 of that Act (consideration given or received for new holding on a reorganisation)).

CHAPTER 8 — Leaving the FINROF regime

Leaving the FINROF regime

85Z9

(1) The provisions of this Part apply to a FINROF until the date specified in an election under this regulation made by the manager.

(2) An election under this regulation must be made to HM Revenue and Customs in writing and must comply with the following provisions of this regulation.

(3) An election may only be made in respect of a FINROF if—

(a) the FINROF does not meet the investment condition—

(i) at the date specified in the election, and

(ii) at the date on which the election is made,

(b) the FINROF has been subject to this Part for at least one complete accounting period, and

(4) An election under this regulation must specify the date from which this Part ceases to apply to the FINROF.

(5) But the date specified in paragraph (4) must not be earlier than the date which is 3 months before the date on which the election is made.

Requirement to notify participants when a fund leaves the FINROF regime

85Z10

(1) If an election is made under regulation 85Z9, the legal owner must notify the participants in a fund that this Part no longer applies to the fund but continues to apply to a participant unless an election is made in accordance with regulation 85Z11.

(2) The notification under paragraph (1) must be made within a period of 3 months beginning with the date mentioned in regulation 85Z9(5).

(3) An authorised investment fund which fails to comply with this regulation is liable to a penalty not exceeding £3,000 determined in accordance with section 100 of TMA 1970.

(4) Sections 100A, 100B, 102, 103(4) and 118(2) of TMA 1970 apply to a penalty determined in accordance with paragraph (3).

Participant’s power to elect for deemed disposal

85Z11

(1) Notwithstanding an election made under regulation 85Z9, this Part continues to apply to a participant in a FINROF unless the participant makes an election in accordance with paragraph (2).

(2) A participant in the fund may make an election to be treated—

(a) as disposing of the units owned by the participant in the FINROF at their market value on the deemed disposal date, and

(b) as acquiring units in the authorised investment fund on the deemed disposal date.

(3) The income gain arising on the deemed disposal referred to in paragraph (2)(a) shall be determined in accordance with Chapter 6 of this Part.

(4) The acquisition referred to in paragraph (2)(b) is treated as made for a consideration equal to the consideration for the disposal referred to in paragraph (2)(a).

(5) An election may not be made under paragraph (2) unless the income gain arising on the disposal referred to in paragraph (2)(a) (determined in accordance with Chapter 6 of this Part) is greater than zero.

(6) If the participant is chargeable to income tax, the election mentioned in paragraph (2) must be made by being included in a return made for the tax year which includes the deemed disposal date.

(7) If the participant is chargeable to corporation tax, the election mentioned in paragraph (2) must be made by being included in the participant’s company tax return for the accounting period which includes the deemed disposal date.

(8) In this regulation—

“company tax return” has the same meaning as in Schedule 18 to the Finance Act 1998; andthe “deemed disposal date” means the date on which, in accordance with regulation 85Z9, the fund ceases to be a FINROF.

Income treated as an annual payment treated as foreign income

48A

If there is a foreign element of the tax treated as deducted under regulation 48(2)(b) (see regulation 48B), a corresponding proportionate part of the distribution which is treated as an annual payment under regulation 48(2)(a) is treated as if it were income that—

(a) arises in a territory of the kind mentioned in regulation 48B(3)(a), and

(b) is income by reference to which the tax treated under that provision as payable was computed.

Tax treated as deducted from a dividend distribution

48B

(1) The tax treated as deducted under regulation 48(2)(b) (“the deemed deduction”) is treated as income tax.

(2) But paragraph (1) does not apply to any foreign element of the deemed deduction.

(3) Instead, for the purposes of the Tax Acts the foreign element of the deemed deduction is treated as if it were tax—

(a) payable under the law of a territory outside the United Kingdom with which there are not in force any arrangements under section 2(1) of TIOPA 2010 (double taxation relief by agreement),

(b) calculated by reference to income arising or any chargeable gain accruing, in the territory, and

(4) The amount of the foreign element of the deemed deduction is the amount, if any, by which the participant’s portion of the legal owner’s liability to corporation tax in respect of the gross income is reduced by any relief which is given, or falls to be given by way of a credit under section 18 of TIOPA 2010 (entitlement to credit for foreign tax reduces UK tax by amount of the credit).

(5) For the purposes of paragraph (4) the participant’s portion shall be determined by reference to the proportions in which participants have rights in the authorised investment fund in the distribution period in question.

Calculation of unfranked part of dividend distribution

References to gross income

Participants chargeable to corporation tax: holdings in qualified investor schemes and long-term asset funds where scheme does not meet the genuine diversity of ownership condition

Repayments of tax

Companies carrying on general insurance business: treatment of certain amounts of tax as foreign tax

Diversely owned AIFs and financial traders: treatment of shares and units

Financial traders: amounts to be brought into account in respect of shares or units held in diversely owned AIFs

Shares and units not within regulation 52C

Meaning of financial trader

Authorised investment funds having interests in offshore non-reporting funds

Interests in offshore non-reporting funds: general

14ZA

(1) Regulation 14ZB applies if—

(a) an authorised investment fund disposes of an asset which is an interest in a non-reporting fund (“the asset”); and

(b) the conditions in paragraph (2) are satisfied for the period beginning with the date on which the authorised investment fund acquired the asset and ending on the date of the disposal.

(2) The conditions are that—

(a) the authorised investment fund has access to the accounts of the non-reporting fund,

(b) the authorised investment fund had sufficient information about the non-reporting fund referred to in paragraph (1)(a) to enable it to prepare computations of reportable income for the non-reporting fund for every accounting period which, if the non-reporting fund were a reporting fund, would be a reporting period ending within the period mentioned in paragraph (1)(b),

(d) any excess of the authorised investment fund’s share of the reportable income of the non-reporting fund over the authorised investment fund’s share of the distributions made by the non-reporting fund is included in the amount available for income allocation by the authorised investment fund for each reporting period of the authorised investment fund which falls within the period mentioned in paragraph (1)(b).

(3) An authorised investment fund has an interest in a non-reporting fund if and to the extent that it has an interest in such a fund for the purposes of the Offshore Funds Regulations.

(4) For the purposes of the computations mentioned in paragraph (2)(b), regulation 80 of the Offshore Funds Regulations applies if (and only if) the non-reporting fund is a UCITS fund.

(5) In this regulation, “UCITS fund” has the same meaning as in regulation 12 of the Offshore Funds Regulations and “reporting period” has the same meaning as in regulation 91 of those Regulations.

Treatment of disposal of interest in non-reporting fund

14ZB

No tax shall be charged on the authorised investment fund under regulation 17 of the Offshore Funds Regulations on the disposal by the authorised investment fund of an asset which is an interest in a non-reporting fund at the time of the disposal.

Treatment of interest in non-reporting fund: cases where the conditions in regulation 14ZA(2) would not be satisfied

14ZC

(1) This regulation applies in relation to an asset of an authorised investment fund (“the asset”) which—

(a) is an interest in a non-reporting fund, but

(b) in relation to which the conditions in regulation 14ZA(2) would not (apart from this regulation) be satisfied for the whole of the period specified in regulation 14ZA(1)(b) in relation to the asset.

(2) Paragraph (4) applies if the authorised investment fund, in relation to the asset, reasonably expects to satisfy the conditions in regulation 14ZA(2) for the period beginning with a date to be determined in accordance with paragraph (3) (“the deemed start date”) and ending on the date of the disposal of the asset.

(3) The deemed start date is a date to be determined by the authorised investment fund but which must not be earlier than 6th March 2011.

(4) The authorised investment fund is treated for all purposes (including for the purposes of determining the beginning of the period mentioned in regulation 14ZA(1)(b)) as if it had, on the deemed start date, disposed of the asset (and not satisfied the conditions in regulation 14ZA(2)) and immediately reacquired the asset for a consideration equal to its market value on the deemed start date.

(5) The authorised investment fund must notify the Commissioners of the deemed start date by making an appropriate entry in its tax return for the accounting period in which the deemed start date falls.

Authorised investment funds with limited investment powers – stamp duty reserve tax

Treatments applying to authorised investment funds with specific investment purposes

Index tracking funds

14ZD

(1) This regulation applies if—

(a) an authorised investment fund has an interest in a non-reporting fund, and

(b) the conditions in paragraph (2) are met throughout the relevant period.

(2) The conditions are that—

(a) in accordance with either the authorised investment fund’s prospectus or the instrument constituting the authorised investment fund, the aim of the authorised investment fund’s investment policy is to replicate the performance of a qualifying index,

(b) the main purpose of the investment in the non-reporting fund is to represent the composition of the qualifying index, and

(c) the capital and income returns of the authorised investment fund replicate as closely as practicable the returns of the investments comprised in the qualifying index.

(3) For the purposes of paragraph (2) an index is a “qualifying index” if—

(a) it is based solely on the value of securities listed on a recognised stock exchange or admitted to trading on a regulated market,

(b) either the Financial Conduct Authority or an authority responsible for regulating offshore funds recognises the index on the basis that—

(i) its composition is sufficiently diverse,

(ii) it represents an adequate benchmark for the market to which it refers, and

(iii) it is published in such a way that it is widely available, and

(c) it is calculated and published by a body which is managed independently from the management of the authorised investment fund.

(4) Regulation 17 of the Offshore Funds Regulations does not apply in respect of a disposal of the interest in the non-reporting fund by the authorised investment fund.

(5) In this regulation “the relevant period” means the period—

(a) starting on the day the authorised investment fund acquires the interest in the non-reporting fund (or any part of it), and

(b) ending on the day of the disposal of the interest.

(6) In this regulation—

(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(b) “regulated market” means—

(i) a UK regulated market within the meaning given by Article 2.1(13A) of Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments,

(ii) an EU regulated market within the meaning given by Article 2.1(13B) of that Regulation, and

(iii) a Gibraltar regulated market within the meaning given by Article 26(11)(b)(i) of that Regulation.

Authorised investment funds with limited investment powers – stamp duty reserve tax

Modification of CTA 2009

96A

(1) CTA 2009 is modified as follows.

(2) In section 490 (holdings in OEICs, unit trusts and offshore funds treated as creditor relationship rights)—

(a) for subsection (2) the following subsection is treated as substituted—

(2) The Corporation Tax Acts have effect for the accounting period in accordance with subsections (3) and (3A) as if— (a) the relevant holding were rights under a creditor relationship of the company, and (b) any distribution in respect of the relevant holding were not a distribution (and accordingly is within Part 5).

(b) after subsection (3) the following subsections are treated as inserted—

(3A) To the extent that any distribution to which subsection (2)(b) applies relates to an unfranked part of a dividend distribution— (a) regulation 48(2)(b) of the Authorised Investment Funds (Tax) Regulations 2006 applies to determine the amount of the distribution and any tax treated as deducted from that distribution, and (b) regulations 48A and 48B of those Regulations apply to determine the amount of any foreign income and the foreign element of the tax treated as deducted. (3B) For the purposes of subsection (3A)— (a) “dividend distribution” has the meaning given by regulation 22(3) of the Authorised Investment Funds (Tax) Regulations 2006, and (b) regulation 49 of those Regulations explains how to calculate the unfranked part of the dividend distribution.

; and

Conversions and exchanges

Conversion to property AIF

69Z24E

(1) This regulation applies if—

(a) a fund (“the pre-conversion fund”) which is not a property AIF becomes, or intends to become, a property AIF,

(b) the unit-holders in the pre-conversion fund dispose of the units which they hold in that fund (“the original units”) and, as part of an arrangement, acquire units of the same, or substantially the same, value as the original units in the fund which is, or is intended to become, the dedicated feeder fund for the property AIF, and

(2) Sections 127 to 131 of TCGA apply in relation to the disposal and subsequent acquisition of units specified in this regulation.

(3) A fund converting to a property AIF in accordance with this regulation shall be treated as meeting condition A in regulation 69K (the corporate ownership condition) where the conditions in paragraph (4) are met, notwithstanding that the holding of a body corporate in the property AIF may exceed the percentage mentioned in regulation 69K(3)(a) during the relevant period.

(4) The conditions in this paragraph are that—

(a) during the relevant period, no distributions are declared or made,

(b) any distribution which was declared before the beginning of the relevant period is paid before the beginning of that period, and

(c) the units held by the body corporate in the property AIF are exchanged for units in the dedicated feeder fund as soon as reasonably practicable.

(5) In this regulation, “the relevant period” is the period beginning with the time at which the fund becomes a property AIF and ending with the time at which the units in the dedicated feeder fund for the property AIF are issued to a participant which is a body corporate.

Exchange of units

69Z24F

(1) This regulation applies if—

(a) there is—

(i) an exchange of units in a dedicated feeder fund for shares in the property AIF for which that fund is the dedicated feeder fund, or

(ii) an exchange of shares in a property AIF for units in the dedicated feeder fund for that property AIF, and

(b) the further requirement of regulation 69Z24G is met.

(2) The units to be exchanged in accordance with either paragraph (1)(a) or (b) must represent the same, or substantially the same, share of the net asset value of the property AIF as the units which are held immediately after the exchange.

(3) Sections 127 to 131 of TCGA 1992 apply in relation to a disposal or acquisition of units or shares specified in paragraph (1).

Further requirement

69Z24G

The further requirement is that if a transaction involves the acquisition of units in a dedicated feeder fund, that it is undertaken with the agreement of the manager of the property AIF.

Application of section 137 of TCGA

69Z24H

Section 137 of TCGA (restriction on application of tax treatment) applies to any transaction specified in regulations 69Z24E or 69Z24F in the circumstances mentioned in that section.

Annual payments to non-residents

Annual Payments – duty to deduct income tax

46A

(1) An annual payment made to a participant which meets the conditions in paragraphs (2) to (6) is not a qualifying annual payment for the purposes of Chapter 6 of Part 15 of ITA 2007 (deduction from annual payments and royalties).

(2) The payment must be charged to income tax under Chapter 7 of Part 5 of ITTOIA 2005 (annual payments not otherwise charged).

(3) The payment must be made in respect of the participant’s interest in an authorised investment fund other than a Property AIF.

(4) The payment and the amount of the payment must be directly or indirectly referable to, and must not be more than, any management fees paid to the manager of the authorised investment fund in respect of the participant’s interest in the fund.

(5) Any management fees must not exceed an amount representing a reasonable commercial amount in all the circumstances.

(6) At the time the payment is made, the person making the payment must have reasonable grounds for believing that—

(a) the participant is not resident in the United Kingdom, or

(b) the payment is made in respect a class of units in relation to which of the offshore marketing condition in regulation 33A is met.

Consequences of reasonable but incorrect belief

46B

(1) This regulation applies if—

(a) an annual payment is made to a participant without a sum representing income tax on the payment being deducted from it,

(b) at the time the payment is made, the condition in regulation 46A(6)(a) is met,

(d) at the time the payment is made, the participant is resident in the United Kingdom.

(2) Section 900 (deduction from commercial payments made by individuals) and section 901 (deduction from annual payments made by other persons) of ITA 2007 apply as if the payment were a qualifying annual payment.

The offshore marketing condition

33A

The offshore marketing condition is met with respect to a class of units if—

(a) marketing of units of that class is not directed to investors resident in the United Kingdom, and

(b) before units of that class are acquired, information in relation to those units is available to investors to the effect that—

(i) no sum representing income tax will be deducted from any interest distribution in relation to those units, and

(ii) an investor must notify HM Revenue and Customs of any distribution in relation to such units if the investor is chargeable to income tax for the tax year in which the distribution date falls.

Deduction of expenses

12A

Where an authorised investment fund makes an interest distribution for a distribution period, the amount that can be deducted under Step 2 in section 4(2) of CTA 2010 (amounts that can be relieved against the company’s total profits of the period) cannot exceed an amount that would reduce the total profits chargeable to corporation tax for the accounting period in which the last day of the distribution period falls to below the total amount chargeable to corporation tax in accordance with Part 4 of CTA 2009 for that accounting period.

Treatment of interest distributions for purposes of loan relationships

Treatment of deficits on loan relationships

PART2AA — LONG-TERM ASSET FUNDS

Tax treatment of long-term asset funds

14DA

(1) The provisions in paragraph (2) do not apply to a long-term asset fund in relation to an accounting period of the fund unless the genuine diversity of ownership condition is met in relation to that accounting period.

(2) The provisions referred to in paragraph (1) are—

(a) the provisions of Part 2 of these Regulations,

(b) the provisions of Part 4 of these Regulations,

(d) in section 99(1) of TCGA 1992, the words from “except that nothing in this section” to the end of that subsection,

(e) section 100 of TCGA 1992,

(f) where the fund is an open-ended investment company, section 614 of CTA 2010, and

(g) where the fund is an authorised unit trust, section 618 of CTA 2010.

(3) Where the genuine diversity of ownership condition is not met in relation to an accounting period of the fund—

(a) Part 3A of CTA 2010 (companies with small profits) does not apply, and

(b) the total amount shown in the distribution accounts available for distribution to participants must only be shown as available for distribution in accordance with paragraph (1)(b) of regulation 17 (allocation of income for distribution as dividends).

(4) In these Regulations, a “long-term asset fund” means an authorised investment fund whose instrument constituting the fund contains a statement that the fund is a long-term asset fund.

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