MTT10260 - Scope: Excluded entities: Definitions of ‘investment fund’ and ‘REIT’

The meaning of ‘investment fund’ is set out in section 236 of Finance (No.2) Act 2023, and the meaning of ‘REIT’ is set out in section 259 of that Act.

See MTT45110 for guidance on the definition of investment entity and insurance investment entity.

Investment fund

An entity is an investment fund if it meets the conditions in section 236 of the Act.

Many funds – most obviously, but not exclusively, those which are listed – have arrangements in place for the transfer of interests in those funds between investors. Such funds should not be regarded as failing the conditions in section 236(a) or (c) simply because they now have investors which did not provide the assets which were originally pooled, or because some investors bought shares from others rather than making contributions directly to the fund.

Similarly, the condition in section 236(e) should not be regarded as having been failed simply because one investor acquired a holding of interests in the fund at a different price to another, reflecting changes in the value of the fund.

The condition in section 236(a) refers to what the potential investment fund is designed to do. This test should be applied on an ongoing basis, not once and for all when the fund is set up. For example, some investment trusts were formerly the owners of trading groups, before selling those groups and changing their activities to investment of the trade proceeds. The activities that such entities were designed to do would have changed when they decided to become investment trusts.  In the opposite case, if an investment fund was acquired in its entirety by a single buyer with the intention of retaining it, that entity would no longer be designed to pool assets from a number of unconnected investors and so would cease to be an investment fund from the point of its acquisition.

Sometimes, a fund (the 'main fund') will be set up with a number of “feeder funds” as its immediate direct investors. The investors (in the commercial sense of the word) will invest in the feeder funds, rather than the main fund. Where the main fund and the feeder funds are seen as tax transparent in the territories in which they are created, the feeder funds should be looked through, and the tests in section 236 should be applied to the ultimate investors.

REITs

A real estate investment trust (‘REIT’) may be a UK REIT or an overseas REIT equivalent.

An entity is a ’UK REIT’ if it is:

  • a company UK REIT according to section 524, Part 12, CTA10, or
  • a company that is a member of a group UK REIT according to sections 523 and 606 of CTA10.

An entity is an ‘overseas REIT equivalent’ if it is:

  • equivalent to a UK REIT, and
  • resident in a territory outside the UK.

See IFM21000+ for further guidance on REITs.