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HMRC internal manual

Company Taxation Manual

Authorised investment funds (AIFs): taxation of funds: trading or investment

SI2006/964 Regulation 14E - ‘investment transactions’ of diversely owned funds

Regulation 14E prevents defined financial transactions carried out by diversely owned authorised investment funds (AIFs) from being characterised as trading transactions for tax purposes. This rule gives diversely owned AIFs certainty that gains on the realisation of certain types of investments, which would not be chargeable gains (see CTM48215), cannot be re-characterised as profits arising from a trade which would then be taxable as income.

The rule applies where an AIF:

  • carries out an ‘investment transaction’ (see CTM48282) in an accounting period; and
  • meets the genuine diversity of ownership condition (see CTM48155 to CTM48170) throughout that period.

An AIF meeting those two conditions is referred to as a ‘diversely owned AIF’.

Where the rule applies, all capital profits, gains or losses arising from ‘investment transactions’ are treated as non-trading and the corporation tax provisions under which trading profits and losses are computed and charged do not apply to those transactions.

Capital profits, gains and losses for this purpose are any profits, gains or losses treated as capital for accounting purposes under the Statement of Recommended Practice (SORP) which applies to AIFs.

The rule applies to transactions carried out on or after 1 September 2009.

Capital and revenue

Regulation 14E prevents capital gains being re-characterised as trading profits (and therefore revenue), but it does not prevent revenue profits from ‘investment transactions’ being taxable as income. For example, interest receivable in respect of a loan relationship will be taxable as income even where regulation 14E applies to prevent any capital profit on disposal of the loan relationship being characterised as trading income.

AIFs and trading

Where regulation 14E does not apply, it remains a question of fact whether or not activities carried out by an AIF amount to trading for tax purposes.

In such cases, the normal principles for determining whether or not there is a trade will apply and there is no automatic assumption that transactions which are not ‘investment transactions’ for the purposes of regulation 14E will be trading transactions by default. Where an AIF carries out financial transactions and regulation 14E does not apply, the principles set out in the guidance at BIM20250 onwards should be considered.

Whilst it is possible that some activities carried out by an AIF might, on the facts, amount to trading, there is a general and prevailing assumption that AIFs will not be conducting a trade. The statements published in the August 2002 and December 2005 articles in Tax Bulletins 60 and 80, in relation to AIFs and loan relationships and derivative contracts, continue to apply.