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HMRC internal manual

Company Taxation Manual

Authorised investment funds (AIFs): taxation of funds: interest distributions - qualifying investments test

SI2006/964 Regulations 19 to 21 - test for making an interest distribution

This test must be satisfied by any authorised investment fund (AIF) in order to make an interest distribution. An AIF satisfies the qualifying investments test if at all times throughout the distribution period the market value of its qualifying investments exceeds 60% of all its investments.

The list of qualifying investments is set out in full at Regulation 20 (as qualified by Regulation 21). The qualifying investments either yield interest or, whilst not being interest, give returns whose economic substance is of a similar nature.

The investments used to satisfy the 60% test may include units in another AIF but only if that AIF would itself satisfy the 60% test without counting any investments it (the second AIF) may have in a third AIF as being qualifying investments.

The term ‘investment’ does not, however, include cash on hand which has not yet been invested.

Qualifying investments for the purpose of this test do not include units in an offshore fund or in an unauthorised unit trust.

Alternative finance arrangements

Alternative finance arrangements as defined at FA05/S46 are qualifying investments for the purpose of Regulation 20. A distribution derived from these investments may be treated in the same ways as one derived from interest bearing investments.