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HMRC internal manual

Company Taxation Manual

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HM Revenue & Customs
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authorised investment funds: taxation of participants within the charge to CT: dividend distributions

Special treatment is provided for dividend distributions in the hands of participants in authorised investment funds (AIFs) when they are within the charge to CT. The treatment (which applies to all companies and other bodies within the charge to CT) is designed to prevent companies liable for the full rate of CT from reducing their tax bill by channelling some types of investment (such as bonds) through AIFs. This could otherwise enable them to receive franked investment income that would have borne tax at only the lower rate of IT.

Note that if the participant is itself an AIF then it remains subject to this special treatment as an AIF is a body within the charge to CT.

Treatment applying – SI2006/964 Regulations 48 to 50

When a dividend distribution is made, then in the hands of a unit holder (participant) within the charge to CT part of the distribution is treated as unfranked. The unfranked part of the distribution is then treated, in the hands of the unit holder, as an annual payment received after deduction of IT at the lower rate (Regulation 48).

Any right to repayment of the IT treated as deducted is limited by Regulation 52. This has the result that any repayment must not exceed the participant’s share of the AIF’s liability to CT in respect of the gross income for the distribution period inquestion.

The remaining part of the dividend distribution is treated by the recipient in the same manner as for other UK company dividends.

The calculation of the unfranked part of the dividend distribution is set out in Regulations 49 and 50. The purpose of the calculation is to ensure that the participant’s share of unfranked income arising to the AIF is not treated as dividend income in the hands of the participant.

Distributions received by the fund manager SI2006/964 Regulation 51

The units in respect of which the dividend distribution is made may be held by the management company for the AIF making the distribution in the ordinary course of its business as manager of the fund. In this case, the special treatment described above does not apply and the whole of the dividend distribution will be treated as a trading receipt by virtue of ICTA1988/S95.

If, however, the fund manager holds the units as investments, then the special treatment described above will still apply.