Investment trusts: interest distributions: taxation of companies making interest distributions
General rules for investment trusts (ITs) and prospective investment trusts (PITs)
Under regulation 10 SI2009/2034 where a company is an IT or PIT (see CTM47515) and makes an interest distribution in respect of an accounting period (AP), this is treated as a loan relationship debit (as defined in CTA09/S302 (6)). The amount treated as an interest distribution cannot exceed the total amount of the qualifying interest income (QII) received for the AP (see CTM47525).
By treating the interest distribution as a loan relationship debit, if this equals the QII received for the same AP (less any expenses deductible for corporation tax), the deduction received can be set off against the QII to eliminate any corporation tax that would otherwise be due on the QII. (It should be noted that there are no specific rules for the treatment of management expenses within SI2009/2034, so the rules contained in ICTA88/S75 continue to apply to an IT or PIT in the normal way. In particular, deductible management expenses may be set off against taxable income.)
In the hands of investors the distribution is treated in the same way as a payment of yearly interest (see CTM47540).
Deduction of income tax at source (regulation 13 SI2009/2034)
An interest distribution is treated as a payment of yearly interest and income tax at the basic rate is deducted by the IT, PIT or a company as described below, in accordance with section ITA07/S874 (2) when a payment is made to the investor, unless the payment falls within the gross payment category (see below). The company must account for the income tax on forms CT61 in the usual way.
Payments without deduction of tax
Some investors are entitled to receive payments of interest distributions without deduction of tax (gross payments) - see CTM47545 to CTM47565.
Companies that are not ITs or PITs but have issued a purported interest distribution
Interest distributions can only be made by ITs and PITs. However, companies that make an interest distribution part way through the AP but fail to gain approval under section ICTA88/S842 at the end of the AP, and cannot demonstrate the tests required to be a PIT (see CTM47515), will not be required to re-characterise the purported interest distribution made to investors. Thus under regulation 11(4) SI2009/2034 investors will continue to treat the distribution as though they had received interest and so the company will be required to deduct income tax at source as described above, where necessary.
In the event that a company fails to gain approval as an IT and cannot show that it met the tests to be a PIT when the distribution(s) was/were made, then any such purported interest distribution will not be treated as a loan relationship debit and the consequences of this is that the QII (see CTM47525 to CTM47530) received for the AP will be subject to corporation tax in the normal way.
(Under regulation 12 SI2009/2034, where a company fails to be approved as an IT then it will not be entitled to issue an interest distribution in respect of the AP after being informed by HMRC that its approval under section ICTA88/S842 is not granted.)