IFM02240 - Authorised investment funds (AIFs): taxation of funds: interest paid, loan relationships and derivative contracts

The borrowing powers of an authorised investment fund are restricted by regulations made by the Financial Conduct Authority.

Interest paid treated as a loan relationship debit

Interest paid by an authorised investment fund is within rules on loan relationships (Parts 5 and 6 of Corporation Tax Act 2009 – “CTA09”) and is allowable as a deduction in computing its profits for CT purposes. However, under regulations 12A and 13(1A) of SI 2006/964, to the extent an interest distribution derived from property income interest paid is deductible from corporation tax profits. Such a deduction cannot reduce profits arising from property income to less than zero.

Loan relationships - capital profits and losses

Any profits or losses on loan relationships which are treated, for accounting purposes, as capital by the Statement of Recommended Practice specific to AIFs must not be brought into account as loan relationship credits or debits. This follows from requirements at Regulation 10 of SI 2006/964.

The reason for this is that the profits, gains or losses of an authorised investment fund treated, for accounting purposes, as capital are exempted from corporation tax (IFM02210).

Derivative contracts - profits or losses treated as income

Profits or losses on derivatives, whether trading or non-trading, that are treated as income for accounting purposes are taxed under the normal rules (Part 7 of CTA09).

Derivative contracts - Capital profits or losses

The capital profits of an authorised investment fund (AIF) which are derived from transactions in futures, options, swaps or similar derivatives are exempt from tax. Where the contract is a ‘derivative contract’ within the rules in Part 7 of CTA09 then profits, gains and losses that are treated as capital for accounting purposes by the Statement of Recommended Practice for AIFs are not taxed or relieved. This follows from Regulation 11 of SI 2006/964.