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HMRC internal manual

Company Taxation Manual

HM Revenue & Customs
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Tax elected funds (TEFs): tax treatment of distributions in the hands of participants: TEF distributions (dividends) - specific treatment for investors within the charge to corporation tax

Treatment of property investment income within the corporate streaming rules (in regulations 48 to 52A SI2006/964)

Special treatment is provided for dividend distributions in the hands of participants in authorised investment funds (AIFs) when they are within the charge to CT. The treatment is designed to prevent companies liable for the full rate of CT from reducing their tax bill by channelling some types of investment (such as bonds) through AIFs. This could otherwise enable them to receive franked investment income that would have borne tax at only the basic rate of income tax.

This treatment (known as the ‘corporate streaming’ rules) is contained in regulations 48 to 52A SI2006/964 with modifications set out in regulation 69Z62 SI2009/2036. Corporate streaming only becomes relevant to the TEF regime where a TEF receives property investment or property business income or receives any non-exempt dividends. Where such income is received and distributed out to participants within the charge to CT as a TEF distribution (dividend), then under regulation 69Z57(2) SI2006/964, this part of the distribution should be treated as unfranked investment income.

Therefore, in the case of a TEF, the corporate streaming rules apply only to the amount attributed to TEF distributions (dividend) (regulation 69Z62(2)(b) SI 2006/964 as amended by regulation 19 SI 2010/294). For further details on the corporate streaming rules in general, please refer to CTM48515.

Example of corporate streaming from a TEF

As stated above, the corporate streaming rules apply to investors within the charge to CT (other than those where the income from the TEF is on trading account) and it is only to the TEF distribution (dividends) with income received from property that the corporate streaming rules should be applied.

A TEF has income as follows:

  Income from:    
Type of investment Equity investments UK-REIT/PAIF Bonds
Type of investment income Dividends Net PIDs Interest
Amount for distribution 40 24 40
Chargeable to CT No No [a] Yes
Management expenses [b]     15
Net for distribution 40 24 25
Allocate to [c] TEF distributions (dividends) TEF distributions (dividends) TEF distributions (non-dividend)

[a] income tax suffered is not reclaimable by fund

[b] assuming that expenses are allocated against taxable income

[c] the dividend stream is a total of 64 (40 + 24) and the non-dividend stream is 25.

In the hands of a corporate investor the ‘dividend stream’ of £64 is subject to corporate streaming (unless the investor is treated as receiving trading income from the TEF, in which case the corporate streaming rules do NOT apply - regulation 48(2A)(a) as amended by SI 2010/294).

The unfranked part of the TEF distributions (dividends) is the net PID in this example and is treated as an annual payment with income tax deducted at the basic rate. For the purposes of the calculation, the unfranked part of the dividend must be grossed up under regulation 42(2)(b) SI 2006/964 - see table below.

  Distribution from a TEF Total income
Franked part of dividend 40  
Unfranked dividend 24 30 [d]
Non-dividend income 25 25
Total income subject to CT   55
Total tax exempt dividend income (Franked part of dividend)   40

[d] deemed income tax credit of 6 is set against CT of the investor in priority to any other tax but cannot be ‘repaid ‘ as no tax has been paid in the TEF (see regulation 52 SI 2006/964.