Tax elected funds (TEFs): tax treatment & distributions made by TEFs: tax treatment of components of income received by a TEF
This page explains the tax treatment of the various component parts of the income received by a TEF. While the aim of the TEF regime is to move the point of taxation from the authorised investment fund (AIF) to the investor, there are certain circumstances when a tax liability may be incurred by the AIF - this is also explained below.
Most company distributions received by the TEF are exempt from corporation tax (CT) under Part 9A CTA 2009 in the same way as for any other body within the charge to corporation tax (CT). However, there may be certain circumstances where the distributions received will be taxable, for instance if the distributions do not qualify for exemption under Part 9A. If this is the case, then the distributions will be subject to CT in the same way as taxable income is treated in an AIF that has not elected for TEF status (see IFM02220).
Property investment income
Any property income distributions (PIDs) received from a UK real estate investment trust (UK REIT) and/or a property authorised investment fund (PAIF) will be received net of basic rate of income tax. Regulation 69Z24 of SI 2006/964 applies this treatment to PAIFs if the same treatment would apply to a Real Estate Investment Trust. The TEF cannot claim back or offset the tax deducted by the UK REIT or PAIF (regulation 69Z57 SI2006/964) and the net PID received will be treated as though it is an exempt distribution under Part 9A CTA 2009.
Property Business Income
Any income from a UK or overseas property business is prohibited in the TEF. If the property condition (see IFM06130) is inadvertently breached (see IFM06530) then until the TEF corrects rectifies the inadvertent breach, any income received will be subject to CT in the same way as taxable income is treated in an AIF that has not elected for TEF status (see IFM02220). (If there is a deliberate breach of the property condition then a termination notice will be issued by HMRC - see IFM06520.)
Any other income received - likely to be interest - is taxable in the hands of the TEF. However, as all the income received in this category of income must be attributed and paid out as a TEF distributions (non-dividend), which regulation 69Z61 of SI2006/964 treats this as a payment of yearly interest, then under regulation 13 of SI2006/964 the distribution is treated as a loan relationship debit.
Therefore, TEF distributions (non-dividend) are allowed as a deduction against the TEF’s category of other income for CT purposes thus eliminating any CT liability that would otherwise occur on this taxable income.
Offshore income gains
Where a TEF realises an offshore income gain (see Part 2 of the Offshore Funds (Tax) Regulations 2009), normal rules will apply. Where a TEF makes a disposal of a holding in a non-reporting offshore fund the gain is treated as income for tax purposes but for accounting purposes is treated as a capital receipt. The income gain is liable to CT.
The exception to the rule mentioned above is where a TEF falls within Part 6A of SI 2009/964 (Funds investing non-reporting offshore funds).