Exceptions to meaning of mutual fund: condition F: not “relevant income-producing assets”- Section 357 (5) TIOPA 2010
Even if a date of termination is stated or determinable under the arrangements, the arrangements are not a mutual fund if none of the assets of the arrangement are “relevant income-producing assets” (see below). The exception provided by S357(5) is designed to exclude arrangements which invest in assets intended to give a purely capital growth based return.
The term ”relevant income producing assets” is defined at S358 TIOPA 2010 and means assets which produce income on which, if they were held directly by an individual resident in the United Kingdom, the individual would be charged to Income Tax (S358(2) TIOPA 2010). That would include, for example, sums that would be treated as offshore income gains generated by the sale of investments in underlying non-reporting funds. This is subject to limited exceptions, as follows -
- There may be cases where underlying assets are acquired (and on which income would arise) but which are hedged using derivatives (such as a total return swap). Section 358(3) ensures that such assets that are hedged are not regarded as income producing assets if no income arises or is expected to arise from the asset (after allowing for the effect of the hedging arrangements) or from the hedging arrangements themselves.
- A further exception applies where incidental income arises from cash awaiting investment being placed on deposit, provided that the sums in question and all income produced are subsequently invested in assets that are not themselves relevant income-producing assets as soon as reasonably practicable (Section 358(4).
HMRC accept that cash awaiting investment, and interest earned whilst it is on deposit, has been invested in assets that are not themselves relevant income-producing assets as soon “as reasonably practicable” where it can be demonstrated that sums have been invested in line with the stated intentions in the fund prospectus without any unreasonable delay. For example, if the fund is intended to provide a capital-only return by reference to an index then provided sums subscribed by investors were used to purchase the assets required to achieve that aim without undue delay then the exception would be satisfied. There may also be exceptional circumstances applying, such as extreme volatility in the markets, so that a delay in investing sums subscribed would be reasonable provided the delay was not contrived.
However, Condition F will not be met where the arrangements are designed to produce a return for investors that is equivalent, in substance, to interest and such arrangements will therefore meet the definition of a mutual fund and will be an offshore fund (section 357(4)(c) - OFM06300).