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HMRC internal manual

Company Taxation Manual

Authorised investment funds (AIFs): gross payment of interest distributions: introduction

Sections 349A and 349B ICTA 1988 and SI2006/964 Regulation 26

Where an interest distribution to a unit holder is made there is a range of circumstances in which payments must be made without deduction of income tax. These are:

  • where the participant (beneficial owner of the units) is a company or the trustees of a unit trust scheme (SI2006/964 Regulation 26(4)). Note that the term ‘participant’ is defined at SI2006/964 Regulation 6(6). The definition excludes nominee companies (as they are not beneficial owners) and the trustees of a bare trust.
  • where there is an automatic entitlement to payment without deduction in circumstances where the statutory obligation to deduct in ICTA88/S349 (2) is over-ridden by ICTA88/S349A for particular types of participant (CTM48610).
  • where the participants satisfy one of the other conditions listed in Regulation 26:

    • the reputable intermediary condition (CTM48615),
    • the residence condition (CTM48635).

    Subject to the rules set out in each case these conditions enable individuals who are not ordinarily resident in the UK or who are resident but have no liability to IT to receive interest distributions without deduction of tax.

    On the first occasion when a fund (open-ended investment company or the trustees of an authorised unit trust) makes an interest distribution without deduction of tax to one or more unit holders, it should notify the HMRC Audit Unit (Information Returns). Where a fund is an umbrella scheme, a separate notification must be made in respect of each sub-fund that makes an interest distribution without deduction of tax.

    Interest distributions made before 16 October 2002

    The rules for gross distributions to be made were more restrictive and gross payments could be made only to non-resident companies and not ordinarily resident individuals and only from a limited range of ‘eligible income’. This consisted of amounts that were not normally subject to tax by deduction. In case of any queries arising about gross payments made before 16 October 2002 please contact CTIAA (Collective Investment Schemes) for advice.