Exceptions to meaning of mutual fund: condition E - Section 357(3) TIOPA 2010
The most important exception, provided by condition E (section 357(3)), is that a reasonable investor cannot expect the arrangements to terminate on or by a date fixed in advance.
This condition means, for example, that ordinary shares in any company with defined share capital (that is, not an open-ended company with variable share capital) and which does not have a limited life, will not be an offshore fund.
Condition E requires that the arrangements are not such that they are designed to terminate on a date that is stated or determinable under the arrangements. As elsewhere “arrangements” has a wide meaning and is not limited to the documents establishing the fund, so can include all agreements and understandings. Similarly, “determinable” has a wide meaning. So for example, if a fund prospectus stated that the fund was intended to wind-up after it had realised all of its assets, but those assets consisted of debt instruments none of which was longer dated than 5 years then the termination date would be determinable (unless, of course, it was clear that the fund would reinvest the proceeds of asset realisations and was not ‘limited life’ in any other regard).
It will not be sufficient to satisfy condition E for a fund to state that an intention to dispose of its assets on or by a certain date is subject to market conditions or some similar caveat where it is clear that a long-stop date exists, or there is no specific and realistic possibility that would lead a reasonable investor to conclude that the fund would not necessarily be able to dispose of its assets by the date stated. For example, if a fund’s assets consist of short-dated debt instruments, or commercial leases with a life of 20 years then, unless the fund was reasonably likely to re-invest funds from disposals, condition E could not be satisfied. Where there is no such long-stop date implicit from the nature of the assets themselves then condition E may still not be satisfied if a fund stated an intention to dispose of its assets in, say, four years’ time ‘subject to market conditions’ or some other broad statement.
HMRC will consider particular cases where a fund manager or its advisers believe that there are tangible and specific reasons why such a statement should lead to condition E being satisfied but this is expected to apply in exceptional circumstances only. An example of the circumstances when a broad statement relating to whether assets could be realised on or by a given date may be sufficient to satisfy condition E would be if a fund held significant assets in a country about which there were real and significant concerns regarding any future government’s policy in respect of the assets in question (such as public declarations of an intention to nationalise particular industries or companies in which the fund holds significant investments).
Where arrangements provide for a continuation vote or similar action to determine whether they will persist beyond a given date that will not, in itself, mean that condition E is not met. So, if a reasonable investor, considering all of the facts, could not have any expectation that a continuation vote would fail then, provided the continuation vote was not for a determinable period and absent any other factors, the arrangements could not be said to have a determinable life and condition E could then be satisfied. HMRC accept that it could usually be expected that condition E would be satisfied where continuation votes are provided for because continuation resolutions may well be passed if a fund is performing well, and a reasonable investor would be expected to invest on the basis that a fund would be successful. However, if arrangements or understandings are in place so that it could be expected that a continuation vote would not be passed then there would be a determinable date. Even if a date of termination is stated or determinable, so that condition E could not be satisfied, it is still necessary to consider Condition F to determine if the arrangements amount to a ‘mutual fund’ - see OFM06300 to OFM06600.