PART 2U.K.THE TAX TREATMENT OF AUTHORISED INVESTMENT FUNDS

Loan relationships and derivative contracts: exclusion of capital profits, gains or lossesU.K.

General rule for loan relationships: exclusion of capital profits, gains or lossesU.K.

10.—(1) This regulation applies if any profits, gains or losses arising to an authorised investment fund from a creditor relationship in an accounting period are capital profits, gains or losses.

(2) For the purposes of Chapter 2 of Part 4 of FA 1996 M1 (loan relationships) those profits, gains or losses must not be brought into account as credits or debits.

(3) Regulation 12 explains what is meant by “capital profits, gains or losses” in the case of an authorised investment fund that prepares accounts in accordance with UK generally accepted accounting practice.

[F1(4) This regulation is subject to regulation 14B (tax treatment of qualified investor schemes.]

Textual Amendments

Marginal Citations

General rule for derivative contracts: exclusion of capital profits, gains or lossesU.K.

11.—(1) This regulation applies if any profits, gains or losses arising to an authorised investment fund from a derivative contract in an accounting period are capital profits, gains or losses.

(2) For the purposes of Schedule 26 to FA 2002 M2 (derivative contracts) those profits, gains or losses must not be brought into account as credits or debits.

(3) Regulation 12 explains what is meant by “capital profits, gains or losses” in the case of an authorised investment fund that prepares accounts in accordance with UK generally accepted accounting practice.

[F2(4) This regulation is subject to regulation 14B (tax treatment of qualified investor schemes).]

Textual Amendments

Marginal Citations

Accounts prepared in accordance with UK generally accepted accounting practiceU.K.

12.—(1) In the case of an authorised investment fund that prepares accounts in accordance with UK generally accepted accounting practice, capital profits, gains or losses arising from a creditor relationship in an accounting period, or capital profits, gains or losses arising from a derivative contract in an accounting period, are such profits, gains or losses as fall to be dealt with under [F3the heading “net capital gains/losses”] in the statement of total return for the accounting period.

(2) For the purposes of paragraph (1), the statement of total return for an accounting period is the statement of total return which, in accordance with the Statement of Recommended Practice used for the accounting period, must be included in the accounts contained in the annual report of the authorised investment fund which deals with the accounting period.

F4(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F4Reg. 12(3) omitted (with effect in accordance with reg. 1(2) of the amending S.I.) by virtue of The Authorised Investment Funds (Tax) (Amendment) Regulations 2010 (S.I. 2010/294), regs. 1(1), 5

Loan relationships: treatment of interest distributions and deficitsU.K.

Treatment of interest distributions for purposes of loan relationshipsU.K.

13.—(1) Chapter 2 of Part 4 of FA 1996 (loan relationships) has effect in relation to an authorised investment fund and to an interest distribution paid by that fund as it would have effect if the interest distribution were interest payable on a loan to the authorised investment fund and were, accordingly, interest under a loan relationship to which the authorised investment fund were a party.

[F5(1A) But paragraph (1) does not apply to the extent that the interest distribution is derived from franked investment income.]

(2) For the purposes of these Regulations, an interest distribution is treated as paid if it is credited to the capital part of the scheme property of an authorised investment fund on behalf of a participant in respect of the participant's accumulation units.

(3) This regulation is subject to regulation 14 [F6and regulation 14B (tax treatment of qualified investor schemes)].

[F7(4) In this regulation an “interest distribution” includes a TEF distribution (non-dividend) (see regulation 69Z61(3)).]

Textual Amendments

F5Reg. 13(1A) inserted (with effect in accordance with reg. 1(2) of the amending S.I.) by The Authorised Investment Funds (Tax) (Amendment No. 2) Regulations 2010 (S.I. 2010/1642), regs. 1(1), 3

Treatment of deficits on loan relationshipsU.K.

14.  Section 83(2)(c) of FA 1996 (carrying back of non-trading deficit on loan relationships) shall not have effect in relation to the loan relationships of an authorised investment fund (so that, accordingly, if for any accounting period there is a deficit on the loan relationships of the authorised investment fund, the deficit may not be carried back to be set off against profits for earlier accounting periods).

[F8This is subject to regulation 14B (tax treatment of qualified investor schemes)]

Textual Amendments

[F9Authorised investment funds having interests in offshore non-reporting fundsU.K.

Textual Amendments

F9Regs. 14ZA-14ZC and cross-heading inserted (with effect in accordance with reg. 1(2) of the amending S.I.) by The Authorised Investment Funds (Tax) (Amendment) Regulations 2011 (S.I. 2011/244), regs. 1(1), 4 (with reg. 8)

Interests in offshore non-reporting funds: generalU.K.

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),

(c)the authorised investment fund has prepared such computations, and

(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 fundU.K.

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 satisfiedU.K.

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.]

[F10Authorised investment funds with limited investment powers – stamp duty reserve taxU.K.

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)

a Saturday, Sunday, Christmas Day or Good Friday; or

(b)

a 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.

Textual Amendments

[F11Treatments applying to authorised investment funds with specific investment purposesU.K.

Textual Amendments

F11Reg. 14ZD and cross-heading inserted (with effect in accordance with reg. 1(2) of the amending S.I.) by The Authorised Investment Funds (Tax) (Amendment No. 2) Regulations 2011 (S.I. 2011/2192), regs. 1(1), 4

Index tracking fundsU.K.

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 a competent authority for the United Kingdom 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)a “competent authority in the United Kingdom” means the authority which is a competent authority for the United Kingdom for the purposes of Directive 2009/65/EC of the European Parliament and of the Council on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), and

(b)“regulated market” has the same meaning as in Directive 2004/39/EC of the European Parliament and of the Council on markets in financial instruments (see article 4.1(14)).]

Authorised investment funds with limited investment powers – stamp duty reserve taxU.K.

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)

a Saturday, Sunday, Christmas Day or Good Friday; or

(b)

a 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.]

Textual Amendments