The Authorised Investment Funds (Tax) Regulations 2006

• (a) anything which should have been included in a return delivered by the company under these Regulations has not been so included,

• (b) anything which should not have been included in a return delivered by the company under these Regulations has been so included, or

• (c) any other error has occurred in a return delivered by the company under these Regulations.

• (2) The company must deliver an amended return correcting the error to an officer of Revenue and Customs without delay.

• (3) If the company delivers an amended return such assessments, adjustments, setoffs or payments or repayments of tax as are necessary for achieving the objective mentioned in paragraph (4) must be made.

• (4) The objective is that the resulting liabilities to income and corporation tax (including interest on unpaid or overpaid tax) of the company or any other person are the same as they would have been if a correct return had been delivered.

CHAPTER7 — LEAVING THE PROPERTY AIF REGIME

Termination by notice: company

69Z36

• (1) This regulation applies if an open-ended investment company to which this Part applies gives a notice under this regulation specifying a date at the end of which this Part is to cease to apply to the company.

• (2) This Part shall cease to apply to the company at the end of that date.

• (3) A notice under paragraph (1) must be given in writing to the Commissioners.

• (4) The date specified under paragraph (1) must be after the date on which the Commissioners receive the notice.

Termination by notice: Commissioners

69Z37

• (1) This regulation applies if the Commissioners give a notice in writing under this paragraph to an open-ended investment company to which this Part applies (a “termination notice”).

• (2) This Part shall cease to apply to the company.

• (3) The Commissioners may give a termination notice only if—

• (a) a provision contained in this Part provides that the Commissioners may give a termination notice,

• (b) there is an intentional or negligent breach of a condition in Chapter 2, or

• (c) there is an attempt to gain a tax advantage to which regulation 69Z10 applies.

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

• (5) If a termination notice is given to an open-ended investment company, this Part shall be taken to have ceased to apply to the open-ended investment company at the end of the accounting period before the accounting period during which the event occurs (or the last event occurs) which caused the Commissioners to give the notice.

Appeal against termination notice

69Z38

• (1) An open-ended investment company 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 the tribunal decides that it was, the tribunal must confirm the notice.

• (5) If the tribunal decides that it was not, the tribunal must set aside the notice.

Company ceasing to be authorised etc.

69Z39

• (1) This regulation applies if an open-ended investment company to which this Part applies—

• (a) ceases to be authorised by the Financial Services Authority,

• (b) ceases to be an open-ended investment company, or

• (c) ceases to carry on property investment business.

• (2) This Part shall cease to apply to the company at the end of the date on which the company ceases to be authorised by the Financial Services Authority, to be an open-ended investment company, or to carry on property investment business (as the case may be).

Mergers

69Z40

• (1) This regulation applies if an open-ended investment company to which this Part applies—

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

• (b) as a result, ceases to meet one or more of the conditions for this Part to apply.

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

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

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

Effects of cessation

69Z41

• (1) The business of F (tax-exempt) shall be treated for the purposes of corporation tax as ceasing immediately before cessation.

• (2) Assets which immediately before cessation are involved in the business of F (tax-exempt) shall be treated for the purposes of corporation tax as being sold by F (tax-exempt) immediately before cessation and reacquired immediately after cessation by F (post-cessation).

• (3) For the purposes of corporation tax, on cessation one accounting period of F (residual) shall end and an accounting period of F (post-cessation) shall begin.

• (4) The sale and reacquisition deemed under paragraph (2) shall not have effect for the purposes of tax in respect of chargeable gains.

• (5) For the purposes of CAA 2001, the sale and re-acquisition deemed under paragraph (2)—

• (a) shall not give rise to allowances or charges, and

• (b) shall not make it possible to make an election under section 198 or 199 of that Act (apportionment).

• (6) For the purposes of CAA 2001, anything done by or to F (tax-exempt) before cessation in relation to an asset which is deemed under paragraph (2) to be sold and re-acquired shall be treated after cessation as having been done by or to F (post-cessation).

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

14A

• (1) Where, for the relevant period—

• (a) an authorised investment fund is constituted as a unit trust scheme (“the scheme”); and

• (b) conditions A to D in this regulation are met,

paragraph 2 of Schedule 19 to the Finance Act 1999 (“FA 1999”) shall not apply to a surrender to the scheme that would, but for this regulation, be taxable under Part II of that Schedule.

• (2) Condition A is that the scheme must be dedicated to investment in the shares of a specified open-ended investment company to which Part 4A applies (“the PAIF”).

• (3) Condition B is that—

• (a) the trust deed of the scheme must specify that the scheme may only invest in the PAIF; and

• (b) the prospectus for the scheme must state that the scheme may only invest in the PAIF.

• (4) Condition C is when an investment in the scheme is made, the scheme must (within one working day of that investment) invest in the PAIF an amount equal to the investment.

• (5) Condition D is that when a withdrawal of investment from the scheme is made, the scheme must (within one working day of that withdrawal) withdraw from the PAIF an amount equal to the withdrawal.

• (6) For the purposes of complying with conditions C and D, an investment in the scheme may not be set off against a withdrawal from the scheme.

• (7) A scheme will not be dedicated to investment in the PAIF for the purpose of condition B if it has any assets other than shares in the PAIF and money.

• (8) In this regulation—

• “relevant period” means the relevant two-week period referred to in paragraph 4(2) of Schedule 19 to FA 1999.

• “surrender” means a surrender within the meaning of paragraph 2 of Schedule 19 to FA 1999.

• “working day” means a day other than—a Saturday, Sunday, Christmas Day or Good Friday; ora Bank Holiday in the United Kingdom under the Banking and Financial Dealings Act 1971.

• “money” includes cash held on deposit but does not include securities of any kind.

PART2A — Qualified Investor Schemes

Tax treatment of qualified investor schemes

14B

• (1) The provisions in paragraph (2) shall not apply to a qualified investor scheme in relation to an accounting period of the scheme unless the genuine diversity of ownership condition (see regulation 9A) 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,

• (aa) the provisions of Part 4 of these Regulations,

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

• (c) where the qualified investor scheme is an authorised unit trust scheme, section 468(1A) of ICTA,

• (d) where the qualified investor scheme is an open-ended investment company, section 468A(1) of ICTA,

• (e) in subsection (1) of section 99 of TCGA 1992 (as modified by these Regulations) the words “except that nothing in this section” to the end of that sub-section, and

• (f) section 100 of TCGA 1992.

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

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

• (b) the total amount available for income allocation to participants must only be allocated in accordance with paragraph (1)(b) of regulation 17 (allocation of income) , and

• (c) Part 3A of CTA 2010 (companies with small profits) does not apply.

• (4) In these Regulations a “qualified investor scheme” means a fund, authorised by the appropriate regulator, in which a statement that the fund is a qualified investor scheme is included in the instrument constituting the scheme.

• (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The genuine diversity of ownership condition

14C

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Clearance in relation to the genuine diversity of ownership condition

14D

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Participants chargeable to corporation tax: holdings in qualified investor schemes where scheme does not meet the genuine diversity of ownership condition

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

Conditions for this Part to apply to a company where the company is also a qualified investor scheme

69DA

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Manufactured dividends representing property income distributions

69Z24A

• (1) This regulation applies to the extent that a manufactured dividend which is paid by a dividend manufacturer is representative of property income distributions to which regulation 69Z15 applies.

• (2) The amount of the manufactured dividend falling within paragraph (1) is referred to in this regulation as “the manufactured PID amount”.

• (3) The recipient of the manufactured PID amount is treated as having received a distribution to which regulation 69Z18 applies.

• (4) In relation to the dividend manufacturer—

• (a) if the dividend manufacturer is a company and the manufactured dividend is paid in the course of a trade carried on in the United Kingdom, the manufactured PID amount shall be treated as an expense of the trade;

• (b) if the manufactured dividend is paid in connection with investment business, the manufactured PID amount shall be treated for the purposes of section 75 of ICTA as expenses of management; and

• (c) in the case of a company carrying on life assurance business, so much of the manufactured PID amount as would be referable by virtue of section 432A of ICTA to basic life assurance and general annuity business if it were received by the company shall be treated for the purposes of section 76 of ICTA as if it were an expense payable falling to be brought into account at step 3 of section 76(7).

• (5) Regulations 69Z22, 69Z24 and 69Z29 to 69Z35 apply to the dividend manufacturer as if—

• (a) the dividend manufacturer were an open-ended investment company to which this Part applies; and

• (b) the manufactured PID amount were a distribution to which those regulations apply.

Manufactured dividends representing PAIF distributions (interest)

69Z24B

• (1) This regulation applies to the extent that a manufactured dividend which is paid by a dividend manufacturer is representative of a PAIF distribution (interest) to which regulation 69Z16 applies.

• (2) The amount of the manufactured dividend to which this regulation applies is referred to in this regulation as the “manufactured PAIF interest amount”.

• (3) If the recipient of the manufactured dividend is a company within the charge to corporation tax it is treated as having received, in relation to the manufactured PAIF interest amount, an amount to which section 97 of FA 1996 applies.

• (4) If the recipient of the manufactured dividend is within the charge to income tax it is treated as having received, in relation to the manufactured PAIF interest amount, an amount to which regulation 69Z19 applies.

• (5) If the dividend manufacturer is a company within the charge to corporation tax, section 97 of FA 1996 is treated as applying to the manufactured PAIF interest amount.

• (6) Regulations 69Z23, 69Z24 and 69Z29 to 69Z35 apply to the dividend manufacturer in relation to the manufactured PAIF interest amount as if the dividend manufacturer were an open-ended investment company to which this Part applies.

Manufactured dividends – PAIF distributions (dividends)

69Z24C

• (1) This regulation applies to the extent that a manufactured dividend which is paid by a dividend manufacturer is representative of a PAIF distribution (dividends) to which regulation 69Z17 applies.

• (2) The recipient of the manufactured dividend is treated as having received, to that extent, an amount to which regulation 69Z20 applies.

• (3) If the dividend manufacturer is a company, paragraph 2(2)(b) of Schedule 23A to ICTA has effect in relation to the amount of the manufactured dividend to which paragraph (1) applies.

Interpretation

69Z24D

In regulations 69Z24A to 69Z24C, “manufactured dividend” and “dividend manufacturer” have the meanings given by Schedule 23A to ICTA .

PART 1A — THE GENUINE DIVERSITY OF OWNERSHIP CONDITION

The genuine diversity of ownership condition

9A

• (1) For the purposes of these Regulations, the genuine diversity of ownership condition is as follows.

• (2) The genuine diversity of ownership condition is that an authorised investment fund must—

• (a) meet conditions A to C throughout the accounting period; or

• (b) comply with paragraph (8).

• (3) Condition A is that the fund documents—

• (a) contain a statement that units in the fund will be widely available,

• (b) specify the intended categories of investor, and

• (c) specify that the manager of the fund must market and make available the units in the fund in accordance with paragraph 9A(6)(a).

• (4) Condition B is that neither—

• (a) the specification of the intended categories of investor, nor

• (b) any other terms or conditions governing participation in the fund, whether or not specified in the fund documents,

have a limiting or deterring effect.

• (5) In paragraph (4) a limiting or deterring effect means an effect which—

• (a) limits investors to a limited number of specific persons or specific groups of connected persons, or

• (b) deters a reasonable investor within the intended categories of investor from investing in the fund.

• (6) Condition C is that—

• (a) units in the fund must be marketed and made available—

• (i) sufficiently widely to reach the intended categories of investors, and

• (ii) in a manner appropriate to attract those categories of investors; and

• (b) a person who is in an intended category of investor can, upon request to the manager of the fund, obtain information about that fund and acquire units in it.

Condition C is subject to paragraph (7).

• (7) Condition C shall be treated as being met even if at the relevant time the fund has no capacity to receive additional investments, unless—

• (a) the capacity of the fund to receive investments in it is fixed by the fund documents (or otherwise), and

• (b) a pre-determined number of specific persons or specific groups of connected persons make investments in the fund which collectively exhausts all, or substantially all, of that capacity.

• (8) An authorised investment fund ... also meets the genuine diversity of ownership condition if—

• (a) an investor in the fund is a unit trust scheme , an offshore fund or another authorised investment fund (a “feeder fund”);

• (b) conditions A to C are met in relation to the authorised investment fund after taking into account—

• (i) the fund documents relating to the feeder fund, and

• (ii) the intended investors in the feeder fund; and

• (c) the authorised investment fund and the feeder fund have the same manager (or proposed manager).

• (8A) For the purposes of these Regulations, a long-term asset fund is treated as meeting the genuine diversity of ownership condition if—

• (a) the fund’s prospectus was published on or before 9th December 2021, or

• (b) at least 70% of the shares or units in the fund are held by one or more relevant investors or by the manager of the fund in the capacity as manager.

• (8B) In paragraph (8A), “relevant investor” means any of the persons specified in categories A to E.

• (8C) Category A is the trustee or manager of—

• (a) an authorised unit trust scheme which meets the genuine diversity of ownership condition, or

• (b) a unit trust scheme which—

• (i) is authorised under the law of a territory outside the United Kingdom in a way which makes it, under that law, the equivalent of an authorised unit trust scheme, and

• (ii) meets conditions A to C or complies with paragraph (8).

• (8D) Category B is a company—

• (a) which is an open-ended investment company which meets the genuine diversity of ownership condition, or

• (b) which—

• (i) is incorporated under the law of a territory outside the United Kingdom and is, under that law, the equivalent of an open-ended investment company, and

• (ii) meets conditions A to C or complies with paragraph (8).

• (8E) Category C is a person acting in the course of a long-term insurance business (that is, the activity of effecting or carrying out contracts of long-term insurance within the meaning of the Financial Services and Markets (Regulated Activities) Order 2001) where—

• (a) that person—

• (i) is authorised under FISMA 2000 to carry on such business, or

• (ii) has an equivalent authorisation under the law of a territory outside the United Kingdom to carry on such business, and

• (b) if that person is a company, it is not a close company.

• (8F) Category D is a person who cannot be liable for corporation tax or income tax (as relevant) on the grounds of sovereign immunity.

• (8G) Category E is the trustee, manager or administrator of a pension scheme (within the meaning given by section 150(1) of the Finance Act 2004) other than an investment regulated pension scheme (within the meaning given by paragraphs 1 and 2 of Schedule 29A to that Act).

• (8H) For the purposes of paragraph (8E)(b) (category C), in applying the rules in Chapter 2 of Part 10 of CTA 2010 to determine whether a company is “a close company”, section 442(a) (non-UK resident companies) is to be treated as omitted.

• (9) In this Part “fund documents” means—

• (a) the instrument constituting the fund, and

• (b) the fund’s prospectus in issue for the time being ... .

Clearance in relation to the genuine diversity of ownership condition

9B

• (1) An application for clearance that an authorised investment fund meets the genuine diversity of ownership condition (see regulation 9A) may be made in writing to the Commissioners by the manager (or proposed manager) of an authorised investment fund.

• (2) An application for clearance must be accompanied by the fund documents in the form in which it is proposed that those documents will apply at the beginning of the first accounting period of the fund for which clearance is sought.

• (3) If regulation 9A(2)(b) and (8) applies, an application for clearance by the authorised investment fund must be accompanied by—

• (a) the documents specified in paragraph (2), and

• (b) the fund documents of the feeder fund in the form in which it is proposed that those documents will apply at the beginning of the first accounting period of the fund for which clearance is sought.

• (4) The Commissioners may require the manager (or proposed manager) to provide further particulars if they believe that full particulars of the fund have not been provided.

• (5) The Commissioners must notify the applicant within 28 days of the receipt of the particulars (or, if paragraph (4) applies, of all further particulars required) that they—

• (a) give clearance that the fund meets the genuine diversity of ownership condition,

• (b) give that clearance subject to conditions, or

• (c) refuse to give that clearance.

• (6) An authorised investment fund (and investors in that fund) may not rely on a clearance given under this regulation if—

• (a) at the beginning of the first accounting period of the fund to which the clearance relates (and at the beginning of each subsequent accounting period), a relevant statement in the fund documents in issue for the time being is not in accordance with a relevant statement in the documents considered by the Commissioners before giving clearance,

• (b) the fund acts or is operated in contravention of a relevant statement in the fund documents,

• (c) the fund documents are materially amended, or

• (d) the fund is operated otherwise than in accordance with condition C of the genuine diversity of ownership condition (see regulation 9A(6)).

• (7) If regulation 9A(2)(b) and (8) applies an authorised investment fund (and investors in that fund) may not rely on a clearance given under this regulation if any of sub-paragraphs (a) to (d) of paragraph (6) apply in relation to either the authorised investment fund or the feeder fund.

• (8) Paragraph (6)(c) does not apply if the manager of the fund has obtained a clearance given under this regulation which applies to the amendment.

• (9) For the purposes of paragraph (6)(c), a material amendment is one that may reasonably be construed as causing, or likely to cause, the fund to fail to meet the genuine diversity of ownership condition in relation to any accounting period.

PART 2B — DIVERSELY OWNED AIFS

Tax treatment of diversely owned AIFs

14E

• (1) This regulation applies to an authorised investment fund in respect of an accounting period if—

• (a) the fund carries out an investment transaction in that period, and

• (b) the fund meets the genuine diversity of ownership condition in relation to that period.

• (2) In these Regulations an authorised investment fund to which this regulation applies is referred to as a “diversely owned AIF”.

• (3) If the profits or losses, as the case may be, arising from an investment transaction are capital profits, gains or losses, that investment transaction shall be treated as a non-trading transaction of the diversely owned AIF for the purposes of corporation tax.

• (4) Chapter 2 of Part 3 of CTA 2009 (income taxed as trade profits) does not apply to capital profits and losses arising from such an investment transaction.

• (5) For the purposes of these Regulations “investment transaction” means a transaction specified in regulation 2 of the Investment Transactions (Tax) Regulations 2014.

• (6) For the purposes of paragraphs (3) and (4) capital profits, gains or losses arising from an investment transaction in an accounting period are such profits, gains or losses as fall to be dealt with under the heading “net capital gains/losses” in the statement of total return for an accounting period.

• (7) For the purposes of paragraph (6), the “statement of total return for an accounting period” has the same meaning as in regulation 12(2).

Meaning of “investment transaction”

14F

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Meaning of relevant contracts: general

14G

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Meaning of relevant contract: options

14H

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Meaning of relevant contract: futures

14I

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Meaning of relevant contract: options and futures - general provisions

14J

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Meaning of relevant contract: contract for differences

14K

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Loan relationships or related transactions

14L

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Units in a collective investment scheme

14M

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Carbon emission trading products

14N

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

52B

• (1) This regulation and regulation 52C apply if a financial trader has held, or holds, shares or units in a diversely owned AIF.

• (2) In computing the trading profits or losses of the financial trader for the relevant period, the following amounts must be brought into account—

• (a) all distributions received by or credited to the financial trader in respect of such shares or units for the relevant period; and

• (b) any amount required to be brought into account under regulation 52C.

• (3) In this regulation and in regulation 52D(2) references to distributions are subject to section 130 of CTA 2009 (insurers receiving distributions etc).

• (4) In this regulation and in regulations 52C and 52D—

• “relevant period” means—in the case of a financial trader within the charge to corporation tax, an accounting period, andin the case of a financial trader within the charge to income tax, a period of account;

• “financial trader” has the meaning given by regulation 52E.

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

52C

• (1) The only amounts that are to be brought into account in computing the trading profits or losses in respect of the shares or units in the diversely owned AIF for the relevant period are—

• (a) amounts that are brought into account in accordance with Cases 1 to 4, and

• (b) amounts within regulation 52B(2)(a).

This is subject to section 130 of CTA 2009 (insurers receiving distributions etc) and regulation 52D.

• (2) Case 1 applies if the financial trader held the shares or units in a diversely owned AIF at the beginning of the relevant period and holds those shares or units throughout that period.

Where Case 1 applies, the amount to be brought into account is the difference between the market value of the shares or units at the end of the immediately preceding relevant period and the market value of those shares or units at the end of the relevant period.

• (3) Case 2 applies if a financial trader acquired shares or units in a diversely owned AIF during the relevant period and retains those shares or units throughout the relevant period.

Where Case 2 applies, the amount to be brought into account is the difference between the market value of the shares or units at the end of the relevant period and the acquisition cost of those shares or units.

• (4) Case 3 applies if the financial trader held shares or units in a diversely owned AIF at the beginning of the relevant period and disposes of those shares or units during that period.

Where Case 3 applies the amount to be brought into account is the difference between the market value of the shares or units at the end of the immediately preceding relevant period and the disposal value of the shares or units.

• (5) Case 4 applies if the financial trader acquires shares or units in a diversely owned AIF during the relevant period and disposes of those shares or units during that period.

Where Case 4 applies the amount to be brought into account is the difference between the acquisition cost of the shares or units and the disposal value of those shares or units.

• (6) In this regulation—

• “acquisition cost” means the value of the consideration given for the acquisition of the shares or units;

• “disposal value” means the value of the consideration received for the disposal of the shares or units;

• “market value” means—in the case of shares or units in a diversely owned AIF where both the buying and selling prices of units are published regularly by the manager of the fund, an amount equal to the buying price (that is the lower price) so published on any particular date or, if none were published on that date, on the latest date before;in the case of shares or units in a diversely owned AIF where a single price is published regularly by the manager of the fund, the price so published on any particular date, or if none were published on that date, on the latest date before.

Shares and units not within regulation 52C

52D

• (1) Regulation 52C does not apply in respect of any shares or units in a diversely owned AIF in relation to which—

• (a) conditions A and B are both satisfied, or

• (b) condition C is satisfied.

• (2) Condition A is that the shares or units in the diversely owned AIF form part of the financial trader’s stock in trade and all the profits and losses, including distributions, arising in relation to the shares or units in the diversely owned AIF are included in the computation of the financial trader’s trading profits for the relevant period.

• (3) Condition B is that the shares or units in the diversely owned AIF are accounted for under generally accepted accounting practice on the basis of fair value accounting.

• (4) Condition C is that the shares or units in the diversely owned AIF are a relevant holding in respect of which the provisions of section 490 of CTA 2009 apply in relation to the financial trader.

• (5) In paragraph (4) “relevant holding” means—

• (a) any rights under a unit trust scheme;

• (b) a material interest in an offshore fund; or

• (c) any shares in an open-ended investment company.

Meaning of financial trader

52E

• (1) In regulations 52B, 52C and 52D “financial trader” means a person who is carrying on a business which is—

• (a) a banking business,

• (b) an insurance business, or

• (c) a business consisting wholly or in part of dealing in trading assets such that any profit on such assets would form part of the trading profits of that business.

This paragraph is subject to paragraphs (2) and (3).

• (2) “An insurance business” in paragraph (1)(b) does not include life assurance business carried on by an insurance company and in the event that such a company carries on both life assurance business and any other insurance business that company will not be a financial trader in respect of the life assurance business.

• (3) If—

• (a) a financial trader, “A”, directly or indirectly transfers trading assets to a diversely owned AIF under or as part of an arrangement which has an unallowable purpose, and

• (b) a connected person, “B”—

• (i) holds shares or units in that diversely owned AIF at the time of the transfer; or

• (ii) directly or indirectly acquires shares or units in that diversely owned AIF at a later time,

B is treated as being a financial trader in relation to those shares or units.

• (4) In paragraphs (1) and (3) “trading assets” means—

• (a) stocks or shares;

• (b) a relevant contract within regulation 14G;

• (c) a loan relationship within regulation 14L;

• (d) units in a collective investment scheme within regulation 14M;

• (e) securities within regulation 14F;

• (f) foreign currency; or

• (g) a carbon emission trading product within regulation 14N,

a profit on the sale of which would form part of the trading profits of the financial trader.

• (5) An arrangement includes any scheme, understanding or transaction of any kind, whether or not legally enforceable and whether involving a single transaction or two or more transactions.

• (6) An arrangement has an unallowable purpose if the main purpose or one of the main purposes for either A or B being party to the arrangement is to obtain a tax advantage or an income tax advantage for any person.

• (7) In paragraph (6)—

• “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;

• (c) property business income (arising on a breach of the property condition), being—

• (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

• (c) property business income.

• (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);”.

• (c) for “an authorised investment fund” in each place it occurs there shall be substituted “a Tax Elected Fund”; and

• (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;

• (c) details of the condition that was breached;

• (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;

• (c) the fund is intentionally or negligently in breach of a condition; or

• (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

• (c) give the reasons for the fund leaving the TEF regime.

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

Allocation of income

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);

• (c) a participant in a fund mentioned in paragraph (a) or (b); and

• (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;

• . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

• . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

• . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

• . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

• (c) HM Revenue and Customs issue a notice in writing that this regulation applies.

• (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

• (c) as a result of the disposal, an income gain (see regulation 85Z) arises to the person making the disposal.

• (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.