Authorised investment funds (AIFs): genuine diversity of ownership condition (GDO): what information should HMRC consider to check that the GDO has been met
Initial checks by HMRC
Initial checks can be carried out by HMRC in two instances:
- when a fund applies for a genuine diversity of ownership condition (GDO) clearance using the advance clearance application; or
- when a fund makes an application for a particular regime in which the GDO has to be met.
The GDO requirements in CTM48160 are designed to ensure that the shares or units are actually made available and marketed to a range of investors and that investment opportunity is not limited only to specified particular persons.
In determining whether these conditions have been met, HMRC should consider:
- the fund documents, to ensure that they contain a statement that the units in the fund will be marketed and made widely available and that they clearly specify the categories of investor,
- the specified categories of investor and whether these are sufficiently wide so that the fund is not limited to a few specific persons named or implied by the given categories. (A group of connected persons will be regarded as one person.)
- whether any terms or conditions may deter or limit investors within the target market from buying units in the fund, by reviewing the fund documents and any other sources of information about the fund, such as its website. For instance whether the minimum investment(s) and charges are set at different levels according to categories of investors, in such a way that would clearly deter a potential investor in a category within the target market, acting reasonably, from investing in a fund, and
- whether there is any evidence of pre-determined limits to specific persons or groups of connected persons that would unfairly limit the number of units available to other categories of investors which remains fixed for a significantly longer period of time than would otherwise be expected.
In respect of the third bullet point and in order to avoid any unnecessary correspondence during the clearance process, a fund may find it helpful to explain in the application the reasons for particular terms and conditions, such as variations in management charges or minimum investment levels for different categories of investors.
Continuing requirements under Condition C of the GDO
In the case where a fund is already established then HMRC would not normally expect the fund documents (or draft fund documents) supplied, to be in conflict with the funds normal practice of marketing and making available the units or shares in the fund, but if there is any conflict then the fund should include an explanation as to why this is the case and where necessary set out proposed changes in practices (to comply with condition C), with their application. See also CTM48175.