Investment trusts: interest distributions: taxation of investors receiving interest distributions
Taxation of investors within the charge to corporation tax
Except as explained below, companies and other specified investors (see CTM48520 onwards) receive interest distributions without deduction of tax and are, consequently, treated as receiving a gross amount of yearly interest. This is treated as a loan relationship credit.
Exception to gross payments to a corporate body
The exception to the rule is where the person receiving the interest is not itself the recipient but is acting as a nominee for the person beneficially entitled to the interest distribution. In such cases income tax will still be deducted at source by the investment trust (IT) and prospective investment trust (PIT) and the participant will be treated as receiving yearly interest with income tax deducted at the basic rate of tax.
This is because ‘recipient’ is defined in the regulations (see regulation 3(2) SI2009/2034) as the person beneficially entitled to the distribution and so the nominee is not the recipient for the purposes of regulation 13(3)(a) SI2009/2034. For similar reasons the payment cannot be an excepted payment within the meaning of ITA07/S933.
Taxation of investors within the charge to income tax
Income tax will normally be deducted at source by an IT or PIT at the basic rate of income tax and in such cases a basic rate taxpayer will be treated as receiving yearly interest with no further tax to pay.
Higher and additional rate taxpayers will have a further liability to income tax to account for.
Investors with no liability to income tax will be able to reclaim the tax deducted without the need for statements about the deduction of income tax, specified in ITA07/S975, as long as the recipient retains copies of the tax vouchers received. Where special rules have been adopted by an IT or PIT for providing tax information to recipients, as explained in CTM47580, the recipient should retain the information set out in CTM47590.
In some cases, individuals may have established entitlement to payment without deduction of tax and so will be treated as receiving a gross amount of yearly interest. Such cases will normally be non-residents or when the individual participant has no liability to UK income tax. Details of entitlement to payments without deduction of tax can be found at CTM47545 to CTM47565.
The IT and PIT is responsible for deducting tax at the basic rate and for paying the tax deducted to HMRC as explained in CTM47535.