Tax elected funds (TEFs): introduction and conditions of membership: introduction
Reference to these pages
These pages should be read as part of the guidance published in respect of ‘The Authorised Investment Funds (Tax) Regulations 2006’ (SI2006/964), which can be found in this manual at CTM48000 onwards. That material applies to tax elected funds (TEFs) in the same way as to other authorised funds, except as set out in Part 4B of the regulations (inserted by SI2009/2036) and explained in the following chapters. All authorised investment funds (AIFs) (including TEFs) are Collective Investment Schemes which are regulated by the Financial Services Authority (FSA) under the terms of the Financial Services and Markets Act 2000 (FSMA00). For further information on Collective Investment Schemes please refer to CTM48105.
What is a TEF and what is the intention of the new regime?
The TEF is a tax regime that applies to an authorised investment fund. It is likely to be beneficial to those funds that invest in a mixed portfolio of assets but do not receive any income directly from a UK or overseas property business. (Funds that specialise in property investment may instead use the Property AIF regime which is set out in CTM48800 to CTM48882.)
The intention of the TEF regime is to move the point of taxation from the TEF to the investor so that the investor is taxed as though they had invested in the underlying assets directly.
How does the TEF regime work?
A TEF is required to make two types of distribution, a dividend distribution and a non-dividend distribution. In general all dividend income received by the TEF will be distributed as a dividend distribution and all other income will be distributed as a non-dividend distribution.
Investors are then taxed as though they have received a dividend, including the non-payable dividend tax credit and a payment of yearly interest.
Under normal corporation tax (CT) rules income from UK dividends and most foreign dividends is exempt from CT in the hands of the TEF. Any other income (such as interest) will be required to be distributed as a non-dividend, for which the TEF will be entitled to receive a deduction up to the same amount to off-set the taxable income that would ordinarily be liable to CT.
Key features of the regime
The TEF regime is elective and in order to become a TEF an existing or new fund will need to meet certain conditions, which are explained in CTM48912 to CTM48916.
An existing or new fund will need to apply to HMRC and receive approval before adopting the new regime. See CTM48921 to CTM48926 for further guidance on the application process.
There are special provisions within the regime that allow a TEF to make tax information available to their participants electronically that would ordinarily have to be sent to participants. See CTM48951 to CTM48956.
There are breaching rules and sanctions if any of the conditions of the regime are not met - the guidance on these rules can be found at CTM48960.
If, after reading this guidance, you have any further queries regarding the TEF regime please refer them to:
HM Revenue & Customs
Collective Investment Schemes Centre
5 Young Street
Tel: 0114 2969361