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HMRC internal manual

Company Taxation Manual

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

This page explains the tax treatment of the various component parts of the income received by a tax elected fund (TEF). While the aim of the TEF regime is to move the point of taxation from the authorised investment fund (AIF) to the investor, there are certain circumstances when a tax liability may be incurred by the AIF - this is also explained below.

Distribution income

Most company distributions received by the TEF are exempt from corporation tax under Part 9A CTA 2009 in the same way as for any other body within the charge to corporation tax (CT). However, there may be certain circumstances where the distributions received will be taxable, for instance if the distributions do not qualify for exemption under Part 9A. If this is the case, then the distributions will be subject to corporation tax (CT) in the same way as taxable income is treated in an AIF that has not elected for TEF status (see CTM48210).

Property investment income

Any property income distributions (PIDs) received from a UK real estate investment trusts (UK-REITs) and/or Property AIFs will be received net of basic rate of income tax under regulation 33 SI2009/2036, which amended regulation 7 of the Real Estate Investment Trusts (Assessment and Recovery of Tax) Regulation 2006 (SI2006/2867). The TEF cannot claim back or offset the tax deducted by the UK-REIT and or Property AIF under regulation 69Z57 SI2006/964 and the net PID received will be treated as though it is an exempt distribution under Part 9A CTA 2009.

Property Business Income

Any income from a UK or overseas property business is prohibited in the TEF. If the property condition (see CTM48913) is inadvertently breached (see CTM48963) then until the TEF corrects rectifies the inadvertent breach, any income received will be subject to CT, in the same way as taxable income is treated in an AIF that has not elected for TEF status (see CTM48210). (If there is a deliberate breach of the property condition then a termination notice will be issued by HMRC - see CTM48962.)

Other income

Any other income received (see CTM48932), which, in the main is likely to be interest, is taxable in the hands of the TEF. However, as all the income received in this category of income must be attributed and paid out as a TEF distributions (non-dividend), which under regulation 69Z61 SI2006/964 treats this as a payment of yearly interest, then under regulation 13 of SI2006/964 (as amended by regulation 7 SI2009/2036) the distribution is treated as a loan relationship debit.

Therefore, TEF distributions (non-dividend) are allowed as a deduction against the TEF’s category of other income for CT purposes thus eliminating any CT liability that would otherwise occur on this taxable income. See CTM48230 to CTM48235 for further information on authorised investment funds and the loan relationship rules.

Offshore income gains

Where a TEF incurs an offshore income gain (as defined in Chapter 5 of Part 17 ICTA 1988, currently being revised), normal rules will apply. That is, where a TEF makes a disposal of a holding in a non-distributing or non-reporting offshore fund, the gain received is treated as income for tax purposes but for accounting purposes is treated as a capital receipt and, because FSA rules prevent the distribution of capital receipts, the income received is liable to CT.

There is an exception to the rule mentioned above (where a TEF incurs an offshore income gain) and this is where a TEF falls within Part 6A of SI 2009/964 (as inserted by SI 2010/294) which are the rules that deal with ‘Funds investing non-reporting offshore funds ‘ (FINROFs).