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HMRC have published a technical note on regulation 17(2) of the Authorised Investment Funds (Tax) Regulations 2006 (SI 2006/964), after representations from the industry.
The regulation forms part of the corporation tax acts dealing with income derived from land and buildings. It states, “Amounts chargeable to corporation tax in accordance with part 4 of CTA 2009 must not be included in any amount of income allocated for distribution as yearly interest.”
HMRC have published a technical note on regulation 17(2) of the Authorised Investment Funds (Tax) Regulations 2006 (SI 2006/964), after representations from the industry.
The regulation forms part of the corporation tax acts dealing with income derived from land and buildings. It states, “Amounts chargeable to corporation tax in accordance with part 4 of CTA 2009 must not be included in any amount of income allocated for distribution as yearly interest.”
The effect of the rule is that, even if a small amount of property income is received, a fund may not pay an interest distribution for the period; it may make only a dividend distribution.
A bond fund paying an interest distribution would normally not derive income directly from property – but following the introduction of UK real estate investment trusts (REITS) and property authorised funds (PAIFs), some companies and authorised funds that invest in property are paying property income distributions.
It was brought to HMRC’s notice that certain funds that previously received dividends may now receive property income distributions, which are treated as income from a UK property rental business for tax purposes, rather than as dividends.
The Revenue believes the regulations do not permit a fund that receives property income to make an interest distribution, meaning the regulations will be amended to allow an authorised fund that receives property income and intends to make an interest distribution.
Where an authorised fund is qualified to make an interest distribution in respect of a distribution period, and the fund’s total income for the distribution period includes income chargeable to tax under part 4 of CTA 2009, it will still be able to make an interest distribution but will be subject to corporation tax on its property income, with no amounts being deductible against the income.
Regulation 17(2) will then be deleted.
HMRC say changes will not be retrospective, but the department will not expect funds that have made incorrect distributions to unwind them and to give new and corrected information to investors, provided the error was made in the context of an incorrect reading of regulation 17(2) and there is no significant tax effect.
