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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Deemed loan relationships: holdings in investment funds: overview

Holdings in open-ended investment companies, unit trusts and offshore funds

CTA09/PT6/CH3 modifies the loan relationships rules where a company has a ‘relevant holding’ (CFM43030) in an -

  • open-ended investments company (‘OEIC’),
  • unit trust, or
  • offshore fund

and the OEIC, unit trust or offshore fund fails the ‘qualifying investments test’ (CFM43040).

OEICs and authorised unit trusts (‘AUTs’) are referred to collectively as Authorised Investment Funds (‘AIFs’), and are regulated by the Financial Services Authority (‘FSA’). Unauthorised unit trusts (‘UUTs’) are, as the name suggests, unit trust schemes which are not authorised by the FSA. All of these entities are defined as ‘collective investment schemes’ by the FSA (Section 235 Financial Services and Markets Act (‘FSMA’) 2000), and the terms open-ended investment company and unit trust are defined at sections 236 and 237 FSMA respectively.

The definition of an ‘offshore fund’ is given at ICTA88/S756A to S756C, replaced by a new definition at FA08/S40A (as inserted by FA09/SCH22) with effect from 1 December 2009. The new definition of an offshore fund is detached from the regulatory definition of collective investment schemes, and instead is based on a characteristics test.

Guidance on the taxation of AIFs, UUTs and their investors can be found in the Company Taxation Manual (CTM48000) and in the Savings and Investment Manual (SAIM6000). Guidance on the taxation of investors in offshore funds can also be found at SAIM6000 and, in relation to the new definition of an offshore fund, in a new offshore funds manual due for publication in 2009.

For convenience, OEICs, unit trusts and offshore funds are referred to collectively in this manual as ‘investment funds’.

Purpose of legislation

Shares in AIFs, UUTs and non-transparent (for chargeable gains purposes) offshore funds are treated as holdings of shares. A holding in them would not, without further provision, fall under the loan relationships rules. A company could accordingly avoid capital profits and losses from creditor loan relationships by interposing an investment in an OEIC, unit trust or offshore fund between itself and its holding of the debt assets. The rules in CTA09/PT6/CH3 prevent this. There are equivalent rules for derivative contracts (CFM54000).

If a company holds

  • shares in an OEIC,
  • rights under a unit trust, or
  • an interest in an offshore fund,

and the company, scheme or offshore fund (that is, the target of the company’s investment, not the investing company itself) fails the ‘qualifying investments test’ (CFM43040), the company’s ‘relevant holding’ (CFM43030) in the collective investment scheme, is treated as if it is a creditor loan relationship of the company. CFM43020 gives an example of the effect of the legislation.