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HMRC internal manual

Company Taxation Manual

Tax elected funds (TEFs): tax treatment of distributions in the hands of participants: TEF distributions (non-dividend) - general treatment and taxation of investors within the charge to income tax

Where a tax elected fund (TEF) makes TEF distributions (non-dividend) the participant is treated as receiving payments of yearly interest under regulation 69Z61 SI2006/964, as explained in CTM48933.

For participants within the charge to income tax (IT), a sum representing IT at the basic rate will normally be deducted at source by the TEF (CTM48260) and in such cases the participant is treated as receiving yearly interest with IT deducted at the basic rate.

Higher rate taxpayers will have a further liability to tax to account for.

Participants with no liability to IT will be able to reclaim the tax deducted.

However, in some cases, individuals may have established entitlement to payment without deduction of tax and so will be treated as receiving a gross amount of yearly interest. Such cases will normally be non-resident individuals. Details of entitlement to payments without deduction of tax can be found at CTM48600 onwards.

The TEF (the open-ended investment company or the trustees of the authorised unit trust) is responsible for deducting tax at the basic rate and for paying the tax deducted to HMRC.

The TEF is also responsible for making gross payments where the participant has met certain requirements and is obliged to notify HMRC (The Collective Investment Scheme Centre) of gross payments made and is subject to audit by HMRC (CTM48600 onwards).