Finance Act 1996

Non-qualifying investments test U.K.

8 (1) For the purposes of paragraph 4 above a unit trust scheme or offshore fund fails to satisfy the non-qualifying investments test at any time when the market value of the qualifying investments exceeds 60 per cent. of the market value of all the investments of the scheme or fund. U.K.

(2) Subject to sub-paragraph (8) below, in this paragraph “qualifying investments”, in relation to a unit trust scheme or offshore fund, means investments of the scheme or fund which are of any of the following descriptions—

(a) money placed at interest;

(b) securities;

(c) shares in a building society;

(d) qualifying holdings in a unit trust scheme or an offshore fund [F1 or an open-ended investment company].

[F2 (e) derivative contracts whose underlying subject matter consists wholly of any one or more of the following—

(i) the matters referred to in paragraphs (a) to (d) above, and

(ii) currency;

(f) contracts for differences whose underlying subject matter consists wholly of any one or more of the following—

(i) interest rates,

(ii) creditworthiness, and

(ii) currency;

(g) derivative contracts not within paragraph (e) or (f) where there is a hedging relationship between the derivative contract and an asset within paragraphs (a) to (d) above;

(h) alternative finance arrangements.]

(3) For the purposes of sub-paragraph (2) above a holding in a unit trust scheme or offshore fund [F3 or open-ended investment company] is a qualifying holding at any time if—

(a) at that time, or

(b) at any other time in the same accounting period,

that scheme or fund [F4 or company] would itself fail (even on the relevant assumption) to satisfy the non-qualifying investments test.

[F5 (3A) For the purposes of sub-paragraph (3) above an open-ended investment company fails to satisfy the non-qualifying investments test at any time when the market value of the investments of the company which are qualifying investments exceeds 60 per cent. of the market value of all its investments.]

(4) For the purposes of [F6 sub-paragraphs (3) and (3A)] above the relevant assumption is that investments of the scheme or fund [F7 or company] are qualifying investments in relation to that scheme or fund [F7 or company] only if they fall within [F8 paragraphs (a) to (c) and (e) to (h) of sub-paragraph (2) above].

(5) References in this paragraph to investments of a unit trust scheme or offshore fund are references, as the case may be—

(a) to investments subject to the trusts of the scheme, or

(b) to assets of the fund,

but in neither case do they include references to cash awaiting investment.

[F9 (5A) References in this paragraph to investments of an open-ended investment company are references to investments comprised in the scheme property of that company, but do not include references to cash awaiting investment.]

(6) References in this paragraph to a holding—

(a) in relation to a unit trust scheme, are references to an entitlement to a share in the investments of the scheme; and

(b) in relation to an offshore fund, are references to shares in any company by which that fund is constituted or any entitlement to a share in the investments of the fund.

[F10 and

F10 (c) in relation to an open-ended investment company, are references to shares in that company.]

[F11 (6A) For the purposes of sub-paragraph (6)(c) above, where in respect of a given class of shares of an open-ended investment company—

(a) shares issued of that class consist of both smaller denomination shares and larger denomination shares, and

(b) a person owns both smaller denomination shares and larger denomination shares of that class,

those shares owned by him shall be treated as being securities of the same class for the purposes of the provisions of the Tax Acts and the 1992 Act relating to ownership of shares in a company.

F11 (6B) In sub-paragraph (6A) above, “smaller denomination shares” means shares to which are attached rights specified in the open-ended investment company’s instrument of incorporation that are expressed in the smaller of two denominations, and “larger denomination shares” means shares to which are attached rights so specified that are expressed in the larger of two denominations.]

(7) In this paragraph “security” does not include shares in a company.

[F12 (7A) In this paragraph—

(a) “collective investment scheme” has the meaning given by [F13 235 of the Financial Services and Markets Act 2000];

(b) “open-ended investment company” means, subject to sub-paragraph (7B) below, an open-ended investment company within the meaning given by [F13 236 of the Financial Services and Markets Act 2000] which is incorporated in the United Kingdom;

(c) “scheme property” of an open-ended investment company means, subject to sub-paragraph (7C)(b) below, the property subject to the collective investment scheme constituted by the company;

(d) references to a person owning shares in an open-ended investment company are references to—

(i) the beneficial owner of the shares,

(ii) where the shares are held on trust (other than a bare trust), the trustees of the trust, or

(iii) where the shares are comprised in the estate of a deceased person, the deceased’s personal representatives.

F12 (7B) Each of the parts of an umbrella company shall be regarded for the purposes of this paragraph as an open-ended investment company and the umbrella company as a whole shall not be so regarded and shall not be regarded as a company.

F12 (7C) In relation to a part of an umbrella company—

(a) references in this paragraph to investments of an open-ended investment company shall have effect as references to such of the investments as under the arrangements referred to in sub-paragraph (7D) below form part of the separate pool to which that part of the umbrella company relates;

(b) references in this paragraph to the scheme property of an open-ended investment company shall have effect as if they were references to such property subject to the collective investment scheme constituted by the umbrella company as is comprised in the separate pool to which that part of the umbrella company relates;

(c) a person for the time being having rights in that part shall be regarded as the owner of shares in the open-ended investment company which that part is deemed to be by virtue of sub-paragraph (7B) above, and not as the owner of shares in the umbrella company itself.

F12 (7D) In sub-paragraphs (7B) and (7C) above “umbrella company” means a company—

(a) which falls within the definition of “open-ended investment company” in [F13 236 of the Financial Services and Markets Act 2000],

(b) which is incorporated in the United Kingdom,

(c) whose instrument of incorporation provides for arrangements for such pooling as is mentioned in section [F14 235(3)(a)] of that Act in relation to separate parts of the scheme property of the company, and

(d) the owners of shares in which are entitled to exchange rights in one part for rights in another;

and any reference to a part of an umbrella company is a reference to such of the arrangements as relate to a separate pool.]

[F15 (7E) For the purposes of this paragraph—

• “contract for differences” has the same meaning as in paragraph 12 of Schedule 26 to the Finance Act 2002;

• “derivative contract” means—

  (a)

  a contract which is a derivative contract within the meaning of that Schedule, or

  (b)

  a contract which is, in the accounting period in question, treated as if it were a derivative contract by virtue of paragraph 36 of that Schedule (contracts relating to holdings in unit trust schemes, open-ended investment companies and offshore funds);

• “underlying subject matter” has the same meaning as in paragraph 11 of that Schedule.]

[F16 (7F) In this paragraph “offshore fund” has the same meaning as in Chapter 5 of Part 17 of the Taxes Act 1988 and references to the assets of an offshore fund shall be construed in accordance with that Chapter.]

[F17 (7G) For the purposes of this paragraph, in relation to a unit trust scheme, offshore fund or open-ended investment company, there is a hedging relationship between a derivative contract on the one hand (“the hedging instrument”) and an asset on the other (“the hedged item”) if and to the extent that—

(a) the hedging instrument and the hedged item are designated by the scheme, fund or company as a hedge, or

(b) in any other case the hedging instrument is intended to act as a hedge of the exposure to changes in fair value of a hedged item which is a recognised asset or an identified portion of such an asset that is attributable to a particular risk and could affect the total net return of the scheme, fund or company.

(7H) For the purposes of sub-paragraph (7G)(b) above, the “total net return” of a scheme, fund or company means the total net return of the scheme, fund or company, computed—

(a) in accordance with generally accepted accounting practice, or

(b) in the case of accounts prepared in a jurisdiction outside the United Kingdom, in accordance with generally accepted accounting practice in that jurisdiction.

(7I) In this paragraph “alternative finance arrangements” has the meaning given by section 46(1) of the Finance Act 2005.]

(8) The Treasury may by order amend this paragraph so as to extend or restrict the descriptions of investments of a unit trust scheme or offshore fund that are qualifying investments for the purposes of this paragraph.

Textual Amendments

F1 Words in Sch. 10 para. 8(2)(d) added (25.2.1997) by S.I. 1997/213, art. 2

F2 Sch. 10 para. 8(2)(e)-(h) substituted for Sch. 10 para. 8(2)(e) (with effect in accordance with art. 1(2) of the amending S.I.) by The Unit Trust Schemes and Offshore Funds (Non-qualifying Investments Test) Order 2006 (S.I. 2006/981), arts. 1(1), 3

F3 Words in Sch. 10 para. 8(3) inserted (25.2.1997) by S.I. 1997/213, art. 4(a)

F4 Words in Sch. 10 para. 8(3) inserted (25.2.1997) by S.I. 1997/213, art. 4(b)

F5 Sch. 10 para. 8(3A) inserted (25.2.1997) by S.I. 1997/213, art. 5

F6 Words in Sch. 10 para. 8(4) substituted (25.2.1997) by S.I. 1997/213, art. 6(a)

F7 Words in Sch. 10 para. 8(4) inserted (25.2.1997) by S.I. 1997/213, art. 6(b)

F8 Words in Sch. 10 para. 8(4) substituted (with effect in accordance with art. 1(2) of the amending S.I.) by The Unit Trust Schemes and Offshore Funds (Non-qualifying Investments Test) Order 2006 (S.I. 2006/981), arts. 1(1), 4

F9 Sch. 10 para. 8(5A) inserted (25.2.1997) by S.I. 1997/213, art. 7

F10 Sch. 10 para. 8(6)(c) and the preceding word “and” added (25.2.1997) by S.I. 1997/213, art. 8

F11 Sch. 10 para. 8(6A)(6B) inserted (25.2.1997) by S.I. 1997/213, art. 9

F12 Sch. 10 para. 8(7A)-(7D) inserted (25.2.1997) by S.I. 1997/213, art. 10

F13 Words in Sch. 10 para. 8(7A)(a)(b)(7D)(a) substituted (1.12.2001) by S.I. 2001/3629, art. 95(2)(a)(b)(3)(a)

F14 Words in Sch. 10 para. 8(7D)(c) substituted (1.12.2001) by S.I. 2001/3629, art. 95(3)(b)

F15 Sch. 10 para. 8(7E) inserted (with effect in relation to accounting periods beginning on or after 1.10.2002 subject to Sch. 28 of the amending Act) by Finance Act 2002 (c. 23), s. 83, Sch. 27 para. 20(4)

F16 Sch. 10 para. 8(7F) inserted (with effect in accordance with s. 145(2) of the amending Act) by Finance Act 2004 (c. 12), Sch. 26 para. 12(3) (with Sch. 26 para. 17)

F17 Sch. 10 para. 8(7G)-(7I) inserted (with effect in accordance with art. 1(2) of the amending S.I.) by The Unit Trust Schemes and Offshore Funds (Non-qualifying Investments Test) Order 2006 (S.I. 2006/981), arts. 1(1), 5

Modifications etc. (not altering text)

C1 Sch. 10 para. 8(2)(a) modified (7.4.2005) by Finance Act 2005 (c. 7), Sch. 2 para. 9