Investment trusts: interest distributions: prospective investment trust - the intention and reasonable belief test
Definition of a prospective investment trust (PIT)
CTM47505 notes that the tax framework relies on an investment trust company gaining approval to be an investment trust (IT) under section ICTA88/S842, which is only determined at the end of the accounting period (AP).
Therefore, if a company wanted to make an interest distribution part way through the AP, it would not technically be able to do so as it could not be assured of IT status at the time the distribution is made.
Hence, the regulations also provide for a prospective investment trust (PIT) to be able to make an interest distribution.
FA09/S45 defines a PIT as a company that:
- intends to seek approval to be an investment trust under ICTA88/S842 (‘the intention test’) and
- has a reasonable belief that such approval will be obtained (‘the reasonable belief test’).
This means that before an interest distribution is made part way through an AP the company must satisfy itself that it meets the two tests stated above.
If, subsequently, the company gains approval to be an IT under ICTA88/S842 at the end of the AP then HMRC will accept that these tests must have been met. However, if a company issues an interest distribution during an AP and fails to be an approved IT at the end of an AP and does not meet the intention and reasonable belief test, then the consequences are set out CTM47535.
The intention test
In order to satisfy this test (that is, an intention to gain IT status at the end of the AP), a company (planning to issue interest distributions) cannot be said to have the intention to qualify as an IT for an AP if, at the time of issuing such distributions, the company is aware that it has failed any of the conditions in ICTA88/S842 (1) (see CTM47200). Assuming that the company is not aware that an application will succeed then prior history of regular applications for IT status would be regarded by HMRC as sufficient evidence that this test was met. In the absence of such a prior history, HMRC would expect that there would be statements in annual accounts or other company documentation issued or made available to investors that it was the company’s intention to seek section 842 approval or at least board meeting minutes documenting the company’s intention to seek approval status at the end of the AP.
The reasonable belief test
This test was introduced to ensure that a company with an intention to gain section 842 approval would be required to demonstrate that it had a reasonable belief that the tests would be met and that section 842 approval would be granted.
In order to satisfy this test, at the time the interest distribution is issued, the company should have a reasonable belief that the conditions for approval in ICTA88/S842(1)(a), (b) and (e) (see CTM47200) will continue to be met at the end of the AP. The reasonable belief test can be satisfied by demonstrating the following type of activity taken by the company;
- documented discussions at board meetings, before issuing the interest distribution, to confirm whether the company is on course to qualify as an investment trust,
- documented strategy to continually monitor the relevant conditions of approval with an action plan in place if the relevant conditions of approval could be breached, and
- regular updates between the Board and the fund manager to discuss the outcomes of these strategies to demonstrate that they are being acted upon.
The examples of evidence listed above are not exclusive. Any evidence to reasonably demonstrate that the company had met the conditions for approval before the interest distribution was issued and has established practices/processes in place which it uses to monitor the relevant conditions throughout the AP (that is the ones in ICTA88/S842 (1)(a), (b) and (e)), can be used to demonstrate that the company had a reasonable belief that it would qualify to gain section 842 approval at the time that the interest distribution was made.