OSFG01070 - Reinvestment Mechanics

In order to meet the distribution test a fund will normally have to have ‘paid’ a distribution which must be in a form that, to the extent that it does not form the profits of a trade, profession or vocation, would be chargeable, in the case of an individual resident in the UK, to Income Tax under a provision specified in section 830 (2) of ITTOIA 2005 or, in the case of a company resident in the UK, chargeable to Corporation Tax under Case III or Case V of Schedule D in accordance with section 18 ICTA 1988.. A fund with automatic reinvestment of ‘accumulation’ shares may not be able to meet this criterion as there may be doubt about whether it has ‘paid’ a distribution that is capable of being construed as income for UK tax purposes.

Where such a fund nevertheless wishes to benefit from having distributing fund status it can reach agreement with HMRC that it will apply ‘reinvestment mechanics’. The important point here is that the mechanics of reinvestment establish in principle the chargeability to UK tax of the distribution.

We take the view that, it would satisfy ‘paid’ for the purposes of the test, provided the distribution

• passes out of the fund’s control

and

• into the hands of a third party, who can clearly be seen to receive the distribution

and

• to reinvest it in further shares/units or increase in capital value of the existing shares/units on behalf of the relevant participator.

This does require a physical separation of the distribution from the fund and its subsequent reinvestment, not just a paper transaction.