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HMRC internal manual

Company Taxation Manual

Authorised investment funds (AIFs): qualified investor schemes: introduction

A qualified investor scheme (QIS) is a type of authorised investment fund (AIF) which can take on for more sophisticated investors. Like other AIFs, a QIS is subject to regulation by the Financial Conduct Authority (FCA).

A QIS has wider investment and borrowing powers than other AIFs but is subject to lighter regulation because investment in a QIS is open only to ‘qualified investors’. The definition of qualified investors can be found in the FCA ‘COLL’ handbook which is accessible through the FCA website at .

Investors in a QIS will be corporates, other institutional investors (such as pension funds and charities) or sophisticated individual investors who regularly invest significant sums and can be expected to understand the risks involved in a wide range of investments.

Such investors may be in a position to have significant influence over the investment strategy of a fund in which they have a significant holding. The tax rules for QISs therefore stipulate conditions designed to ensure that the tax benefits that apply to AIFs generally only apply to QISs which constitute a genuine collective investment rather than closely held for the benefit of a few individuals. Prior to 2009 this was achieved through a ‘substantial holding’ rule, designed to prevent an investor owning more than 10% of a fund. From 1 January 2009 the substantial holding rule has been replaced by the ‘genuine diversity of ownership condition’ (GDO), applying to the fund rather than the investor.

Tax treatment of a QIS (the taxation of the fund)

From 1 January 2009 the taxation rules that apply to AIFs (generally apply to a QIS only if it meets the GDO. This condition applies to any QIS established (authorised by the FCA) on or after the 1 January 2009 but is also deemed to be met for QISs established before this date, which are subject to transitional arrangements explained in CTM48720.

Where the GDO is not met, the tax consequence for the QIS is that it will be treated as a close investment holding company (see CTM48725).

General tax treatment of investors in an AIF

The general treatment of investors in an AIF is designed to recognise that they have bought units in a pooled investment scheme where the investors have no control over the decisions of the fund manager over when and what investments to buy and sell. Instead of being charged to tax on their share of the income and gains of the scheme they are liable to tax (IT or CT) on the distributions they receive and to CGT (or to CT on chargeable gains) on the gains made when they sell their units. This treats their holding of units in an AIF (that is units in an authorised unit trust or shares in an open-ended investment company) in a similar way to a holding of shares in a normal company (but not exactly the same - see CTM48500 onwards for CT payers and CTM48550 onwards for IT payers).

Tax treatment of investors in a QIS

From the 1 January 2009 the tax treatment for all investors in a QIS, which meets (or is deemed to meet) the GDO, is the same as if they had invested in an ordinary AIF. Prior to this date a different tax treatment applied to any investor with a ‘substantial QIS holding’ (as defined in CTM48730). Transitional arrangements that apply to substantial holders to 31 December 2008 are explained in CTM48715.

Where the GDO is not met, the tax consequences for the investor is that they will be treated as having invested in a close investment holding company (see CTM48720).