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HMRC internal manual

Company Taxation Manual

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HM Revenue & Customs
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AIFs: Property authorised investment funds (Property AIFs): tax treatment of Property AIFs and distributions: charge to tax for distributions to holders of excessive rights

Charge to tax where distribution made to holder of excessive rights (regulation 69Z12SI 2006/964)

Where the Property AIF has paid out a dividend to, or in respect of, a holder ofexcessive rights in the Property AIF (that is, where there has been a breach of thecorporate ownership condition – CTM48817) a tax charge isimposed on the residual business of the Property AIF. The effect of this charge is to taxsuch part of the distribution as arises from the tax exempt income of the Property AIF.

The residual business of the Property AIF is treated as having received an amount ofchargeable income, calculated using the formula I x P%, where:

I is the net income of the tax-exempt business of the Property AIF that is distributable,and

P is the percentage of the rights to the net asset value of the Property AIF representedby shares held by (or on behalf of) the holder of excessive rights.

This sum is charged under Case VI of Schedule D as if it were an additional part of theresidual income of the Property AIF (i.e. that part of its income not derived neither fromthe property investment business).

The charge is part of the CT self assessment of the Property AIF for the period in whichthe distribution is made.

No losses, deficits, expenses or allowances can be set off against the sum to be charged.

Meaning of ‘holder of excessive rights’ (regulation 69Z13 SI 2006/964)

A ‘holder of excessive rights’ means a corporate body participant of theProperty AIF that is beneficially entitled to shares representing rights to 10% or more ofthe net asset value of the Property AIF.

Example of charge to tax

Open-ended investment company ‘A’ is a Property AIF with100,000 shares in issue as at its accounting date of 31 December 2010.

Company ‘B’ owns 12,000 of the issued shares in A.A has total distributable income of £10,000 for the period ended 31December 2010 (of which £7,000 is the net income of the tax-exempt business). A paysdistributions in proportion to its shareholder’s rights on 15 February 2011.

B is a holder of excessive rights because it holds 10% or more of theshares in the Property AIF by net asset value (its holding is, in fact, 12%). B’sbeneficial entitlement to dividends is 12% of the total distributable income ofthe fund, or £12,000 (= 12,000/100,000).

A has not taken ‘reasonable steps’ to prevent B from acquiring 10% or more ofthe net asset value of the fund. A tax charge therefore arises on A, andthis is calculated as follows:

I (net income of the tax-exempt business of the Property AIF) = £7,000;

P% (the percentage of the rights to the net asset value of the PropertyAIF held by (or on behalf of) the holder of excessive rights) = 12%.

The amount charged to tax charge is therefore = I x P%, or £7,000 x 12% = £840.