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HMRC internal manual

Company Taxation Manual

Tax elected funds (TEFs): tax treatment & distributions made by TEFs: components of income received by a TEF

When a tax elected fund (TEF) receives income, it must identify the different elements of the income and classify it into the components specified below, as per regulation 69Z56 SI2006/964. Normal rules for management expenses apply as set out in CTM48225, (therefore managers can choose how best to allocate eligible general management expenses). Any expenses referable to specific income should be allocated against that income.

Dividend income

This is any income received from a company distribution that is taxable or exempt under Part 9A CTA 2009.

Within the TEF regime, the option to tax exempt foreign distributions under CTA09/S931R does not apply.

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Property investment income

This is any property income distributions received from the shares held by a TEF in UK real estate investment trust and/or property authorised investment funds, as explained in CTM48913.

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Property business income

While the property condition (see CTM48913) prevents a TEF from receiving income from a UK or overseas property business, if a TEF inadvertently receives such income for a limited period of time, for instance if it takes over another AIF which happens to have a small amount of UK property income, then while the TEF rectifies the inadvertent breach of the property condition, such income must be recognised in the TEF as property business income (and taxed, as explained inCTM48934).

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Other income

Any income not derived from company distributions, a UK or overseas property business or property income distributions, will fall into this category. The main form of income to fall into this category will be interest received from interest bearing assets.

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The tax treatment of each component part of the income

The tax treatment of each component part of the income in the fund, once it has been attributed into the two types of distributions, is explained in CTM48934.