IFM03330 - Authorised investment funds: taxation of investors within the charge to CT: financial traders and diversely owned AIFs: special rules

Regulations 52B - 52D of SI2006/964

Profits from “investment transactions” accounted for under the heading “net capital gains/losses” in the statement of total return as per the Investment Association’s Statement of Recommended Practice (known as the “IMA SORP”) are treated as non-trading profits when carried out by a diversely owned AIF (see IFM02260). Special rules are therefore needed to prevent financial traders sheltering profits from these types of transactions in such an AIF.

Regulations 52B to 52D set out special rules applying to financial traders holding units in diversely owned AIFs. The rules require the financial trader to include in its computation of trading profits for CT purposes:

  • All distributions; and
  • All realised and unrealised gains/ losses

in respect of the units in the diversely owned AIF arising in each accounting period.

Realised and unrealised gains/ losses in an accounting period are calculated by reference to the difference between the actual disposal value, or market value at the end of the accounting period where the units have not been disposed of, and the market value at the end of the previous accounting period, or the acquisition cost if the units were acquired during the accounting period.

Market value means the price published by the manager of the AIF on the appropriate day, or nearest preceding day. Where the manager publishes both buying and selling prices, the market value will be the buying price (which will be the lower of the two).

The rules are subject to section 130 of the Corporation Tax Act 2009, which means that financial traders which are insurance companies are not required to include distributions from diversely owned AIFs in the computation of trading profits where section 130 would exempt them from that requirement.

The rules do not apply in the following cases:

  • Where the units in the diversely owned AIF are included in the financial trader’s trading stock and all profits/losses, including distributions (subject to section 130), are included in the computation of trading profits on the basis of fair value accounting; or
  • Where the diversely owned AIF is able to make interest distributions, the financial trader must treat the units as a deemed creditor loan relationship which is accounted for on the basis of fair value accounting (see IFM03324).

This is because in both such cases the financial trader will already be recognising the distributions and realised/unrealised gains/losses required by regulations 52B and 52C.