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HMRC internal manual

Company Taxation Manual

Investment trusts: conditions for approval: income

{#IDARVZXG}ICTA88/S842(1)(a), (1AB), (1AC) and (3A)

Wholly or mainly

In order to meet the condition at section 842(1)(a), the company’s income must be derived ‘wholly or mainly’ from shares or securities. This test should normally be regarded as being met where at least 70 per cent of the company’s income is derived from shares and securities, but for a newly formed company’s first accounting period the test may be regarded as being met where at least 50 per cent of the company’s income is derived from shares or securities.

The 70 per cent (or, where appropriate, 50 per cent) test does not have to be met continuously throughout the accounting period, provided it is met for the accounting period as a whole.

Where the company’s income from shares and securities is below 70 per cent or, as the case may be, 50 per cent, you should refer the case to CTIS (Investment Trusts) for advice, setting out the full facts.

{#IDACQZXG}Meaning of income

Income (for the measures both of total income and income from shares and securities) means the gross amount of statutory income, computed in accordance with normal taxation principles and before the deduction of income tax, corporation tax and management expenses. But certain amounts, although remaining taxable in the hands of the investment trust, are excluded for the purposes of the section 842(1)(a) test:

  • Section 842(1AB) provides that, for the purposes of this test, the amounts brought into account under Chapter 2 Part 4 FA 1996 in respect of the company’s loan relationships are deemed to exclude amounts relating to debtor loan relationships. This ensures that income from loan relationships is not measured net of interest etc payable and that income from securities includes income only from creditor (i.e. asset) loan relationships.
  • Section 842(1AC) excludes from the measure of income, for the purposes of this test, reversals of management expenses taxable under Case VI of Schedule D by virtue of section 75B(7)(b) ICTA 1988.
  • Section 842(3A) ensures that offshore income gains taxable under Case VI of Schedule D by virtue of section 761(1) ICTA 1988 are excluded from the measure of income for the purposes of this test. Offshore income gains are not, on first principles, income derived from shares and securities (see Tax Bulletin 79, published on 24 October 2005).

In addition, we do not view taxable interest arising on repayments of VAT as income for the purposes of the section 842(1)(a) test.

As regards trading profits, including those which relate to trading in shares and securities, see CTM47212.

Stock lending fees are income chargeable under Case VI of Schedule D, but are not regarded as income derived from shares and securities.

Manufactured dividends will be treated as income derived from shares and securities for the purposes of section 842(1)(a) to the same extent as the original income would have been so treated. But interest that may be payable following the late payment of manufactured dividends is not regarded as income derived from shares and securities.

Where an investment trust has credits and debits on derivative contracts, which because those contracts are not held for the purposes of a trade fall to be brought into account as non-trading loan relationship credits and debits under paragraph 14(3) Schedule 26 FA 2002, paragraph 39 Schedule 26 FA 2002 provides that the excess of those credits over any debits is treated as income derived from shares and securities.

Where cash collateral is held on deposit, any interest received is not regarded as income derived from shares and securities.

See CTM47305 onwards for the treatment of certain capital profits, gains and losses from loan relationships and derivative contracts, or where an investment trust has profits from transactions in financial futures or options.

{#IDAPRZXG}Meaning of securities

TCGA92/S132(3)(b)

‘Securities’ in section 842 has the same meaning as in section 132(3)(b) TCGA 1992 (CG50220). It includes Treasury Bills and US Treasury Notes, but excludes some types of corporate debt such as Certificates of Deposit and Sterling Commercial Paper. Short-term loans to local authorities are not regarded as securities. Where a claim is made that such a loan is a security, you should obtain a copy of the prospectus of the issue of the loan and refer the case to CTIS (Investment Trusts) setting out the full facts.