The investment restrictions test is a rule formulated to deny
access to distributing fund status to funds that enter into
arrangements that might otherwise provide them with the opportunity
of having income accumulated on their behalf at a level removed
from the fund itself.
There is one restriction laid out in section 760 (3)(a) ICTA
1988 and this relates to funds investing in other funds.
Where an applicant fund,
at any time in the account period for which
application is being made, has invested more than 5% by value of
its assets in other offshore funds then it cannot qualify for
distributing fund status. This means that where the value of the
initial investments in other offshore funds was below 5% of the
assets of the applicant fund, but the value of those investments
increases in the course of an account period so that their value
exceeds 5% of the value of the applicant fund’s assets, then
the Investment Restrictions Test may be breached in those
circumstances. The value of investments in other offshore funds
includes both debt and equity interests. However, for the purposes
of this test, interests in other offshore funds that could
themselves qualify for distributing fund status, whether or not
they have so applied, will be ignored, except in determining the
total value of the assets of the applicant fund.
(Paragraph 6 Schedule 27 ICTA 1988)
For accounting periods commencing before 1 January 2007,
where a second tier fund has invested more than 5% by value of its
assets in other offshore funds, that fund cannot be regarded as a
distributing fund for the purposes of the application for
distributing fund status of the top tier fund.
For accounting periods commencing on or after 1 January 2007,
the restriction in relation to second tier funds that have
themselves relied upon paragraph 6 Schedule 27 ceases to apply. Any
interest in an offshore fund that has qualified or could qualify
for distributing fund status is then ignored for the purposes of
determining whether or not an applicant fund has invested more than
5% of its assets in other offshore funds.
(Section 57(4) FA 2007)
Where an upper tier fund has failed the investment
restrictions test, this will not prevent a lower tier fund making
an application in its own right for distributing fund status.
For the purposes of the test in section 760(3)(a) reference
to offshore funds is to the unmodified (pre FA 2007) definition of
collective investment scheme.
