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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) - specific treatment for investors within the charge to corporation tax distributions

Except as explained below, companies and other specified participants (see CTM48600 onwards) receive interest distributions without deduction of tax and are, consequently, treated as receiving a gross amount of yearly interest (in the same way as they would receive an interest distribution from a bond fund). This is treated as a loan relationship credit by the participant.

The rules requiring holdings in certain funds with significant interest bearing and economically similar investments to be treated as loan relationships, apply to tax elected funds (TEFs) in the same way as they do to authorised funds that have not elected for TEF status (see CTM48505 for further information and regulation 69Z64 SI 2006/964).

Exception to gross payments to a corporate body

The exception to the rule is where the person receiving the interest is not itself the participant but is acting as a nominee for the person beneficially entitled to the interest distribution. In such cases income tax (IT) will still be deducted at source by the AIF and the participant will be treated as receiving yearly interest with IT deducted at the basic rate. However, in a case where the nominee is a reputable intermediary then the TEF distribution (non-dividend) may still be paid gross if certain conditions are satisfied - see CTM48615 for further information.