Collectives: exemptions: exempt investments - interests in other collective investment schemes - practicalities
As outlined in STSM105050, an investment in a collective investment scheme is to be regarded as an exempt investment under FA86/S99(5B)(b) if, and only if, both:
- the underlying scheme is a collective investment scheme as defined in the Financial Services and Markets Act 2000;
- the value of the underlying scheme’s non-exempt investments is no more than 20 per cent of the value of its total investments.
Self-certification - fund managers will need to sign the notice confirming that their investments are either exempt or non-exempt for Schedule 19 purposes. They can categorise investments meeting the above two conditions as exempt.
Cash - which is held for the day-to-day management of a collective investment scheme is not an investment (FA86/S99(5B)(d)) and therefore should not be included in any calculation of whether the 20 per cent limit is met. However, cash holdings which are regarded as investments can be included in the calculation. It is best practice to hold cash held for day-to-day management separately from any cash investments.
Evidence - managers first need to satisfy themselves that the interests they hold are exempt. If they are unable to do this, then they must classify the interests as part of their non-exempt investments. Upon any HM Revenue & Customs (HMRC) enquiry, a manager may be requested to provide evidence that the interest in the underlying scheme did indeed qualify as an exempt investment by meeting the two conditions outlined above. Historic evidence may be used (although at the time that it is being used it should be as far as practical the most recently available version) as long as there is no indication that it has become unreliable or that circumstances have changed. As evidence ages, fund managers will have to be less confident over its reliability.
Acceptable evidence which may be viewed as providing a reasonable basis for deciding that an investment is exempt, and as acceptable evidence to HMRC, might include the following:
- the underlying scheme is listed by a reliable source which indicates that it fulfils the above two conditions. For example, inclusion in a sector classification scheme such as the Investment Management Association sectors, or sectors provided by commercial data providers, where individual sector definitions would require a fund to have no more than 20 per cent of its holdings in non-exempt investments;
- information about the composition of a scheme from the investment policy laid down in a scheme’s rules or instrument of incorporation; or
- other reliable sources of information such as the underlying scheme’s accounts, a fund’s factsheet, or information from the custodian or administrator.
The name of a collective investment scheme is not conclusive evidence as to what type of investments it holds. However, some regulators restrict what schemes can be called. For example, in the UK an authorised fund must not have a misleading name. Where the name of a scheme, in the context of its local regulatory environment, implies that it meets the requirements of the exemption then this may be used as evidence by a fund manager. However, this should be treated as one piece of evidence which will normally require additional validation unless, given the relevant regulatory environment, it is very clear that the scheme meets the requirements of the exemption.
For example, HMRC will accept that interests in a collective investment scheme authorised within the EU that has the words “money market fund” in its title, can be treated as exempt since (amongst other things) it is prohibited from investing in equities, including UK equities.
Calculation and market value - there is guidance on calculating values for ‘N’ and ‘E’ (as required by paragraph 5 of Schedule 19) at STSM104060 and STSM104070. This guidance should be followed, with fund managers needing to determine what is exempt (or not) at the date of any valuation used in that calculation. The method of determination of market value should be consistent across all Schedule 19 requirements. Fund managers do not necessarily need to re-evaluate the exempt status of an investment in an underlying scheme at every valuation point. They will need to judge how frequently to re-evaluate each investment depending on the quality of the evidence previously used and the likelihood of any change in the intervening period. Where an investment qualifies for the exemption by only a small margin then frequent re-evaluation may be necessary.
See STSM101010 for the meaning of a collective investment scheme.
See STSM101020 for the meaning of a unit trust.
See STSM101050 for the meaning of an open-ended investment company.