Investment trusts: interest distributions: when dividends can be designated as interest distributions
Circumstances in which dividends may be treated as interest distributions
Under regulation 4 SI2009/2034 interest distributions can be issued in respect of a period of account (PoA) if:
- a company is an approved investment trust (IT) (see CTM47110) or prospective investment trust (PIT) (see CTM47515) in respect of an accounting period (AP),
- the amount distributed is a dividend in respect that PoA, and
- the distribution is made to investors on or before the first anniversary of the day in which the PoA ends, which is usually within 12 months of the end of the PoA (but see the next paragraph for an explanation of why this may not be the case).
A PoA is the period for which the company makes up is accounts. An AP is defined for tax purposes (in CTA 2009/S9 and 10) and in some circumstances where a PoA lasts longer than twelve months, there may be more than one AP within a given PoA.
Where a PoA includes more than one AP, the company must be an IT or PIT for all the relevant APs.
Treatment of dividends as interest distributions
Under regulation 5 SI2009/2034 an IT or PIT may designate all or part of the dividend it issues as an interest distribution in respect of a PoA, up to the maximum amount of qualifying interest income (QII) received for the relevant AP(s) (defined in CTM47525 to CTM47530).
The designation of a dividend as an interest distribution may be revoked anytime up until the interest distribution is made, but not after.
How to apportion an interest distribution made in respect of a PoA that includes more than one AP
Where an interest distribution is made in respect of a PoA that includes more than one AP, the following formula applies to apportion the distribution to a particular AP:
A x I ÷ T
‘A’ is the qualifying interest income received for the particular AP
‘I’ is the total of the amounts distributed as interest distributions in respect of the whole PoA
‘T’ is the total amount of the qualifying interest income in respect of all the APs in the PoA.
If an investment trust has a PoA lasting eighteen months from 1 January 2010 to 30 June 2011 and makes interest distributions of £150,000, having received QII of £100,000 for the first 12 months of AP 1 (from 1 January 2010 to 31 December 2010) and £70,000 in the last 6 months of the PoA to cover AP 2 (from 1 January 2011 to 30 June 2011), how much can be distributed out as an interest distribution for each AP?
Applying the formula above to the example:
‘A’ would be the QII received for each AP, that is £100,000 for AP1 and £70,000 for AP2
‘I’ would be the total amount of the interest distributed for the PoA, that is £150,000
‘T’ would be the total QII received for the PoA, that is £170,000.
For AP 1, the interest distribution would be:
£100,000 x £150,000 ÷ £170,000 = £88,235.30
In AP 2 the interest distribution would be:
£ 70,000 x £150,000 ÷ £170,000 = £61,764.70