Authorised investment funds: taxation of participants within the charge to CT: loan relationships
A company holding in an authorised investment fund (AIF) is treated as a loanrelationship in some circumstances – paragraph 4 Schedule 10 Finance Act 1996
Company participants could, by investing in AIFs (authorised unit trusts or open-ended investment companies), which are in turn invested in debt assets, avoid the legislation relating to the taxation treatment of loan relationships in FA96.
To prevent this from occurring, where a company holds units in an AIF and that AIF fails the non- qualifying investments test (CTM48510) at anytime in the company’s accounting period, then the company’s holdings are taxed as if they were rights under a creditor relationship of the company participating in the AIF,(FA96/SCH10/PARA4).
Note that any AIF that is able to make interest distributions must necessarily fail the non- qualifying investments test. In some cases AIFs not making or not able to make interest distributions may also fail the non-qualifying investments test (CTM48510).
Such holdings are therefore within the FA96 legislation on loan relationships which requires profits and gains and losses on them to be brought into account on a fair value basis (or mark-to-market basis in accounting periods beginning before 1 January 2005). In this way any gains and losses made by the AIF which are reflected in the value of the units are brought into account for the company holder.
Interest distributions made by an AIF to a company participant whose holding is treated as a loan relationship are brought into account when they are due and payable, in accordance with fair value accounting. (For accounting periods beginning before 1 January 2005 the same treatment applies – FA96/S85 (4).)
Dividend distributions made by an AIF to a company unit holder continue to be treated as dividend income or annual payments as the case may be (CTM48515).
A company has a holding which becomes one which fails the non-qualifying investments test – paragraph 6 Schedule 10 Finance Act 1996.
Where a holding becomes one which fails the non-qualifying investments test at any timein an accounting period of the company, the company is deemed to have acquired a loan relationship at the commencement of that accounting period (FA96/SCH10/PARA6). For the purposes of the loan relationships legislation, the value of the holding at the beginning of that period will be its fair value in accordance with FA96/S85 (CTM53310).