OFM05700 - Meaning of mutual fund: conditions: condition 'C': realisation of investment by reference to NAV or an index: disposals of underlying fund assets - S356(6) TIOPA 2010
Disposals of underlying fund assets
A reasonable investor could expect to realise their investment at or close to NAV as a result of the intention of a fund to dispose of its assets in tranches followed by a final distribution of any remaining assets, as opposed to a liquidation of all of the fund’s assets on a winding-up. For example, a fund may be set up in order to acquire distressed debt assets with an intention to realise those assets as they mature and to distribute the proceeds to investors in the following way -
Step 1: debt assets are acquired with 1, 2 and 3 year lives;
Step 2: the assets are realised, without reinvesting the proceeds, at the various maturity dates;
Step 3: the sums realised on the occasion of each disposal are distributed to investors, and;
Step 4: the fund is formally wound up and any remaining assets distributed.
There would be an expectation of realising an investment in such an arrangement at or close to NAV (‘at NAV’ on the final distribution or perhaps ‘close to NAV’ if remaining negligible assets are not in fact distributed). In those circumstances condition C would be satisfied and the fund would be a mutual fund, so long as conditions A and B were also satisfied and none of the exceptions at S357 TIOPA 2010 applied, and would also therefore be an offshore fund as defined at S355 TIOPA 2010.
In the example above, condition E(not limited life) is not satisfied as the nature of the fund’s assets and the intention not to reinvest them mean that there is a determinable latest termination date- see OFM06200).
Note that in the example above, a UK investor would be treated as making a part-disposal of his or her interest (see S42 TCGA 1992), and if the fund was within the definition of an offshore fund then the treatment of that part-disposal would depend on whether regulation 17 of The Offshore Funds (Tax) Regulations 2009 applied. If regulation 17 did apply then an offshore income gain would arise on any gain, or if it did not apply then any gain would be subject to capital gains tax or corporation tax.