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HMRC internal manual

Company Taxation Manual

AIFs: Property authorised investment funds (Property AIFs): tax treatment of Property AIFs and distributions: general principles

Ring-fencing of tax-exempt business (regulation 69X SI 2006/964)

One fundamental concept underlies the structure of the Property AIF regime, which issimilar to the UK-Real Estate Investment Trust, is that the activities qualifying forexemption from tax are ring-fenced from other activities carried on by other parts of theopen- ended investment company (OEIC).

For CT purposes, the tax-exempt business of a Property AIF is a separate and distinctbusiness from:

  • the OEIC prior to entry into the regime - F (pre-entry),
  • the residual part of the Property AIF business (not part of the tax exempt regime) – F (residual), and
  • the OEIC post-cessation of the regime – F (post-cessation).

Extent of the ring-fence income

The activities that qualify for exemption (and fall within the ring-fence income),relate to the holding of land to generate rental income. It does not include land that isused for trading, such as land held for farming or used for the business of a golf club.Therefore it only activities that are chargeable to tax under Schedule A or the equivalentrules in Case V for overseas property are within the ring fence. The Property IncomeManual gives further details of these activities.

However, some activities that fall within Schedule A are not within the policy objectivesof the regime – one of which was to remove distortions in the rental sector, with afocus on bricks and mortar. This results in some types of business that are withinSchedule A being explicitly excluded from the ring-fence. For example, rent in respect ofway-leaves for oil and gas pipelines are excluded. See CTM48813.

Nature of the ring-fence

The ring-fence is a barrier between the tax-exempt activities of the Property AIF andany other activities it may carry out. It prevents losses or allowances generated in thetax-exempt part of the Property AIF being used to reduce the measure of income arising inthe residual part. This is achieved by deeming the part of the Property AIF that carrieson the tax-exempt business to be a business separate from the remaining part. This catersfor instances where the non tax-exempt part of the business is also in receipt of ScheduleA income (such as fees for mobile phone masts).

Similarly, income accruing to the company after entry into the Property AIF regime, butrelating to the business before it entered the regime, can only be treated as incomerelating to the residual part of the business.

The same principle applies equally to expenses, charges or allowances under regulation 69X(4) SI 2006/964.

Transfer pricing

The exemptions for small and medium sized enterprises in respect of transfer pricing asspecified in paragraphs 5B and 5C of Schedule 28AA to ICTA are disapplied with respect toa Property AIF and its entire business.

Charge to corporation tax (regulation 69Y SI 2006/964)

The net income from the tax exempt part of the Property AIF is not chargeable tocorporation tax (CT).

The net income from the residual business of the Property AIF is within the charge to CT.However, under the streaming provisions of the regime the residual business will obtain adeduction in respect of other taxable income that is distributed to shareholders as a PAIFdistribution (interest). See CTM48833 for details of the rulesrelating to the calculation of the net income of the residual business.