CFM14010 - Collective investment schemes: company holdings: unit trusts, OEIC and offshore funds

Company holdings in Unit Trusts, OEICs and Offshore Funds

This guidance describes the post FA 2002 provisions for the taxation of loan relationships, derivative contracts and forex.

This part of the guidance has described how the loan relationship and derivative contracts regimes are specially adapted in the case of Authorised Unit Trusts (AUTs) and Open-ended Investment Companies (OEICs) by, in effect, excluding capital profits and losses from charge.

Shares in OEICs and units in AUTs are treated as holdings of shares. So a holding in them would not fall under either of these regimes. A company could accordingly partially avoid the loan relationships and derivative contracts legislation by interposing an investment in an AUT or OEIC between itself and the real target debt assets or derivative contracts (see example at CFM14010a). Therefore there are provisions to prevent this.

These provisions are found at FA96/SCH10/PARA4. Although this refers specifically only to rights under a unit trust scheme or any relevant interests in an offshore fund, it also applies to holdings in OEICs by reason of Regulation 95 SI 2006/964 . The provisions apply to holdings in any unit trust scheme and so include units in unauthorised unit trusts. There were only minor changes as a result of FA 2002.

The legislation provides that where a company has

• any rights under a unit trust scheme,
• interest in an offshore fund, or
• shares in an OEIC and
• that unit trust, fund or OEIC fails the non-qualifying investments test at any time in the company's accounting period,

the company's holding is taxed as if it were rights under a creditor relationship of the company.

The holding must be brought into account in accordance with fair value accounting for periods of account beginning on or after 1 January 2005 as set out in FA96/SS85A&85B. For periods of account beginning before 1 January 2005 the holding had to be brought into account in accordance with a mark to market basis of accounting as set out in FA96/S85 (now repealed). In this way any gains and losses made by the unit trust, fund or OEIC that are reflected in the increased value of the units or shares are brought into charge on the company holder. Where a holding becomes or ceases to be one to which these provisions apply, the company is deemed to have acquired a loan relationship at the commencement or disposed of one at the end of its accounting period as applicable.

In determining the credits and debits to be brought into account for the purposes of fair value accounting amounts relating to any investment (for accounting periods ending on or after 6 March 2007) or liability (for accounting periods ending on or after 9 May 2007) certain amounts are left out of account. These are amounts relating to an investment or liability where the investment was made, or the liability was incurred, with the relevant avoidance intention or where any transaction or series of transactions was entered into in relation to the investment or liability with the relevant avoidance intention. By relevant avoidance intention we mean the intention of eliminating or reducing the credits to be brought into account for the purposes of paragraph 4 Schedule 10 FA 1996 or creating or increasing the debits to be brought into account under that paragraph.

Amounts in respect of accounting periods prior to those specified above may only be left out of account if they actually relate to the accounting periods specified above.

Interest distributions made by an Authorised Investment Fund (AUT or OEIC) to a company unit holder whose holding is treated as a loan relationship are brought in to account when they are due and payable but no other distributions of an AIF are to be taken into account. This is because the corporate streaming rules (previously in ICTA88/S468Q and now in Regulations 48-52 SI 2006/964) already bring into corporation tax relevant amounts of dividend distributions from UK authorised funds.

Otherwise, all income arising from a corporate holding in a unit trust, offshore fund or OEIC that is treated as a creditor relationship will be regarded as a loan relationship credit or debit as well as the relevant mark to market movement in the value of the holding (for periods of account beginning before 1 January 2005) and the fair value movement in the value of the holding (for periods of account beginning on or after 1 January 2005).

Please contact CT & VAT Technical where advice is needed on the pre-FA 2002 rules.