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HMRC internal manual

Company Taxation Manual

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Authorised investment funds (AIFs): qualified investor schemes: timing and transitional arrangements for the genuine diversity of ownership condition

When does the genuine diversity of ownership condition come into affect?

The genuine diversity of ownership condition (GDO) replaces the substantial holding rule from the 1 January 2009 and should be applied to all new qualified investor schemes (QISs) that are established on or after that date.

Transitional arrangements for existing QISs

For a QIS that is already established before the 1 January 2009, the GDO is deemed to be met from this date to the end of the first accounting period (AP) beginning on or after the 1 January 2009. For any subsequent accounting period the QIS will need to satisfy the GDO conditions set out in regulation 9A SI2006/964 (as inserted by SI2009/2036). For example if an existing QIS has a 12 month AP that begins on the 1 February 2008, then it will be deemed to meet the GDO from the 1 January 2009 till the 31 January 2010. Therefore, from the 1 February 2010, the fund must meet the general GDO (see CTM48155). However, it will be able to use the clearance provisions in regulation 9B during this period of grace to determine whether the fund documents have been adequately amended to fulfil the GDO. In this example, and taking into account the timetable for clearances, an application for clearance would need to be made by 30 November 2010.

If an existing QIS does not fulfil the GDO after the end of the first AP beginning on or after the 1 January 2009, then the QIS will be treated as a close investment holding company from the beginning of the following AP and the tax consequences are explained in CTM48720.

Transitional arrangements for substantial holders

Where a QIS is established before the 1 January 2009 and has substantial holders (CTM48730), then these investors will have been required to calculate the change in ‘market value’ of their holdings between the last pair of adjacent measuring dates. However, under regulation 31 SI2008/3159 a final measuring date of the 31 December 2008 was added to regulation 56 SI2006/964. This means that a substantial holder will need to fair value their holdings the last measuring date that was used under the substantial holding rules to the 31 December 2008. For further information on how to calculate a change in ‘market value’ between measuring dates please contact Eric McLennan of the Collective Investment Schemes Centre on 0114 2969 791 or via e-mail at eric.j.mclennan@hmrc.gsi.gov.uk

From the 1 January 2009, no further fair value calculations need to be undertaken by a former substantial holder. Therefore, where the QIS is deemed to meet the GDO any such investor will be treated in the same way as an investor in an ordinary AIF. Any disposal of units by a former substantial holder on or after the 1 January 2009 will become liable to tax on any capital gains if the investor is an individual or chargeable to corporation tax (CT) if a corporate but any sums charged to income tax or CT under the substantial holding rules can be deducted from the disposal consideration on the sale of the holdings, to avoid a double charge to tax, as explained in the Capital Gains Manual, page CG10260 ‘Interaction with Income Tax’.