IFM14424 - Condition A

Condition A is that all, or substantially all of the business of the company consists of investing its funds in shares, land or other assets with the aim of spreading investment risk and giving members of the company the benefit of the results of the management of its funds (CTA10/S1158(2)). HMRC’s view is that “substantially all” means at least 90% of the business of the company.

Spreading Investment Risk

Most investment trusts will be listed under Chapter 15 of the UK Listing Rules (closed-ended investment funds). Those rules require a company to have a published investment policy which demonstrates how they intend to manage their assets with a view to spreading investment risk. Chapter 15 listing therefore provides a firm indication that the company meets Condition A and HMRC will generally accept that to be the case unless, exceptionally, evidence suggests otherwise.

For those companies that are not Chapter 15 listed, HMRC will apply a similar approach to that outlined in the Listing Rules to ensure that there is a level playing field for companies listed under Chapter 15 and companies that are not. The Listing Rules apply a purposive approach rather than setting hard limits on, for example, asset allocation or size of holdings. The UK Listing Authority (UKLA) rules are at LR 15.2 of the FCA Handbook, but they may be updated from time to time and regulatory reform may lead to rewrites of the Handbook. HMRC will accept that non-Chapter 15 listed companies that follow the approach outlined in the Listing Rules satisfy Condition A unless, exceptionally, evidence suggests otherwise.

Companies that are not Chapter 15 listed should consider, when applying for approval, whether their published investment policies would meet the requirements of the Chapter 15 listing rules. Where companies are not Chapter 15 listed they should include a side letter with their application to provide further details to explain how they would meet the requirements for spreading risk if they were in fact Chapter 15 listed.

There are provisions deeming condition A to be met for investment trusts being wound up (IFM14430).