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HMRC internal manual

Corporate Finance Manual

Deemed loan relationships: holdings in investment funds: amounts treated as creditor loan relationships

Consequences of loan relationships treatment for holdings in open-ended investment companies, unit trusts and offshore funds

As CFM43010 explains, a company could partially avoid the loan relationships legislation by interposing an investment in an OEIC, unit trust or offshore fund between itself and the real target debt assets (or derivative contracts). CTA09/S490 prevents this by providing that where a company

  • has a ‘relevant holding’ (CFM43030) of shares in an OEIC, rights under a unit trust or interest in an offshore fund, and
  • that unit trust, fund or OEIC fails to meet the qualifying investments test (CFM43040) at any time in the company’s accounting period,

the company’s holding is taxed as if it were rights under a creditor relationship of the company.

The holding must be brought into account in accordance with fair value accounting (CFM21620). In this way any gains and losses made by the unit trust, fund or OEIC that are reflected in the increased value of the units or shares are brought into charge on the company holder. Where a holding becomes or ceases to be one to which these provisions apply, the company is deemed to have acquired a loan relationship at the commencement or disposed of one at the end of its accounting period as applicable.

Interest distributions made by an AIF to a company unit holder whose holding is treated as a loan relationship are brought in to account when they are due and payable but no other distributions of an AIF are to be taken into account. This is because the corporate streaming rules already bring into corporation tax relevant amounts of dividend distributions from UK authorised funds.

Otherwise, all income arising from a corporate holding in a unit trust, offshore fund or OEIC that is treated as a creditor relationship will be regarded as a loan relationship credit or debit as well as the relevant and the fair value movement in the value of the holding.

See CFM43060 for anti-avoidance provisions.