Prospective investment trust (PIT)
The regulations (SI2009/2034) provide for a prospective investment trust (PIT) to be able to make an interest distribution. FA09/S45 defines a PIT as a company that intends to seek approval to be an investment trust (‘the intention test’) and has a reasonable belief that such approval will be obtained (‘the reasonable belief test’). This means that before an interest distribution is made part way through an AP a company must satisfy itself that it meets the two tests above.
If, subsequently, the company gains approval as an investment trust for the AP then HMRC will accept that these tests must have been met. However, if a company issues an interest distribution during an AP and fails to be approved as an investment trust for the AP and does not meet the intention and reasonable belief test, then the purported interest distribution will not be treated as a loan relationship debit and the consequences of this is that the Qualifying Interest Income (QII, (see IFM14288) received for the AP will be subject to corporation tax in the normal way. In such a case, interest distributions already made will continue to be treated as interest distributions in investors’ hands.
The intention and reasonable belief tests
In order to satisfy these tests (that is, an intention to apply for and reasonable belief that it will gain approved IT status at the end of the AP), a company (planning to issue interest distributions) cannot be said to have the intention to qualify as an IT for an AP if, at the time of issuing such distributions, the company is aware that it has failed any of the eligibility conditions in CTA10/S1158, see IFM14422). The company’s records, such as notes of board meetings, may also be relevant evidence of an intention to seek approval. If the conditions are met then the company must have a reasonable belief that they will continue to be met at the end of the AP in question.