Exceptions to meaning of mutual fund: condition F: general - Section S357(4) TIOPA 2010
As explained in OFM06200 even where Condition E is not met the arrangements being considered may still be excepted from the meaning of ‘mutual fund’ where the basic condition D (S355(2) TIOPA 2010) and condition F are met. This is because the purpose of the offshore fund rules is to ensure that income cannot be converted into capital by using offshore arrangements. To avoid unnecessary administrative burdens for arrangements that neither give rise to income at the fund level nor would give the investor an income flow if they invested in the underlying assets directly, closed-ended capital only arrangements are excluded from the definition of a mutual fund in certain circumstances by the exceptions provided by S357(4) TIOPA 2010.
Condition F imposes three conditions that must be satisfied . These are that:
- The arrangements are designed to wind up, dissolve or terminate on a date stated or determinable under the arrangements
- One of S357 subsections (5), (6) or (7) applies, and
- The arrangements are not designed to produce a return for the participants that equates, in substance, to the return of an investment of money at interest.
Condition F cannot apply where the arrangements are designed to produce a return, calculated on the basis of Net Asset Value (see OFM05600), for investors that equates, in substance, to the return on an investment of money at interest (S357(4)(c) TIOPA 2010. The question of whether or not arrangements are designed to produce such a return is determined by reference to the facts, and is not limited to arrangements that provide similar returns to those provided by placing money on deposit (so, for example, it does not matter if the expected return would be greater than would be expected from money placed on deposit). If arrangements provide for a return by reference to a fixed return on capital invested, for example £100 invested provides for a return of £150 in 3 years’ time, then Condition F could not be satisfied.