The Authorised Investment Funds (Tax) (Amendment) Regulations 2010

EXPLANATORY NOTE

(This note is not part of the Regulations)

These Regulations amend the Authorised Investment Funds (Tax) Regulations 2006 (S.I. 2006/964) (“the principal Regulations”).

Regulation 1 provides for citation, commencement and effect. Regulation 2 introduces the amendments to the principal Regulations.

Regulations 2 to 23 make amendments to the principal Regulations. The changes effected by regulations 6, 7, 8, 9, 12, 13, 16, 17, 18, 19 and 20 (which, respectively, amend regulations 14B, 15, 17, 18, 22, 23, 69Z14, 69Z25, 69Z59, 69Z62 and 77 of the principal Regulations) are as a consequence of amendments made by the Financial Services Authority to the Collective Investments Scheme Sourcebook (which can be found at http://www.fsahandbook.info/FSA/html/handbook/COLL). The amending instrument (FSA instrument number 2010/3) can be found at: http://www.fsahandbook.info/FSA/InstrumentsByDate.jsp.

Regulation 3 inserts a reference to Part 6A (which contains provisions relating to Funds Investing in Non-Reporting Offshore Funds) in regulation 2 of the principal Regulations.

Regulation 4 inserts new definitions into regulation 8 of the principal Regulations.

Regulation 5 omits paragraph (3) from regulation 12 of the principal Regulations, which defined Statement of Recommended Practice for the purposes of that regulation. A new definition is now in regulation 8.

Regulation 6 amends regulation 14B of the principal Regulations by replacing references to “distributions” to “income allocation to participants”.

Regulation 7 amends regulation 15 of the principal Regulations by changing the definition of “distributions” for the purposes of the Regulations and including a new definition of “income allocation”.

Regulations 8 and 9 amend, respectively, regulations 17 and 18 of the principal Regulations to make provision about the allocation of income.

Regulation 10 amends regulation 20 of the principal Regulations to include qualifying units in an offshore fund as a new category of qualifying investments.

Regulation 11 amends regulation 21 of the principal Regulations to make further provision about the units in an offshore fund which are qualifying investments.

Regulation 12 amends regulation 22 of the principal Regulations to change a reference to amounts shown in the distribution accounts to amounts available for income allocation.

Regulation 13 amends regulation 23 of the principal Regulations to make provision for amounts available for income allocations which are de minimis.

Regulation 14 substitutes a reference in regulation 48 of the principal Regulations.

Regulation 15 substitutes regulation 50 of the principal Regulations to show how gross income is to be determined.

Regulation 16 amends regulation 69Z14 of the principal Regulations so that references to amounts shown in the distribution accounts of Property AIFs are references to amounts available for income allocation.

Regulation 17 amends regulation 69Z25 of the principal Regulations to refer to an amount available for income allocation.

Regulation 18 amends regulation 69Z59 of the principal Regulations so that references to amounts shown in the distribution accounts of Tax Elected Funds are references to amounts available for income allocation.

Regulation 19 makes an amendment to regulation 69Z62 of the principal Regulations which is consequential on the amendments made to regulation 50.

Regulation 20 amends regulation 77 of the principal Regulations so that the reference to amounts shown in distribution accounts is a reference to amounts available for income allocation.

Regulation 21 inserts a new Part 6A, dealing with a new type of authorised investment fund, a Fund Investing in Non-Reporting Offshore Funds, into the principal Regulations. Part 6A comprises regulations 85A to 85Z11 and is divided into 8 Chapters. Funds to which Part 6A applies are to be known as FINROFs.

Chapter 1 contains preliminary provisions. Regulation 85A provides that Part 6A applies to funds which meet the investment condition, funds which have elected to be treated as FINROFs and to participants in such funds. Regulation 85B sets out the structure of Part 6A. Regulation 85C contains interpretative provisions and regulations 85D to 85F set out the conditions that must be met in order for a fund to be a FINROF, and how a fund may elect to be treated as a FINROF.

Chapter 2 sets out the rules for entry into the FINROF regime. Regulation 85G contains the basic rule and regulations 85H and 85I place a duty on the legal owner of the FINROF to notify HM Revenue and Customs and the participants in the FINROF when the fund becomes a FINROF. Regulation 85J provides for a fund to be treated as if it were not a FINROF if it can show to the satisfaction of HM Revenue and Customs that it had inadvertently met the investment condition in regulation 85D. HM Revenue and Customs must give the legal owner of the fund a written notice to the effect that they are satisfied that meeting the investment condition was inadvertent in order that the fund may not be subject to Part 6A. If they are not so satisfied, they must issue the legal owner with a refusal notice, against which a right of appeal lies to the tribunal (regulation 85K).

Regulation 85L allows participants in a fund which has become a FINROF to make an election to be treated for capital gains tax purposes as disposing of their interest in the fund and immediately acquiring units in the FINROF.

Chapter 3 deals with the tax treatment of FINROFs and of participants in FINROFs. Regulations 85M and 85N make provision for the charge to tax in relation to participants in FINROFs.

Regulations 85O and 85P apply, with modifications, certain provisions of the Taxation of Chargeable Gains Act 1992 (“TCGA 1992”) to the income gains of participants in FINROFs.

Chapter 4 contains exceptions from the charge to tax. Regulation 85Q contains an exception from liability under regulation 85M if the participant is required to treat its units in the FINROF as a loan relationship or a derivative contract.

Regulations 85R to 85T contain exceptions for trading stock, long-term insurance funds of insurance companies and charitable companies and charitable trusts.

Chapter 5 deals with the disposal of units in FINROFs. Regulation 85U provides for the application of the Chapter. Regulation 85V explains when there is a disposal of an asset for the purposes of Part 6A. Regulation 85W contains provisions which are applicable on death. Regulations 85X and 85Y disapply sections 135 and 136 of TCGA 1992 to the extent specified.

Chapter 6 deals with income gains and their computation. Regulation 85Z provides that an income gain arises to a person on disposal of an asset if a basic gain arises on the disposal. Regulation 85Z1 sets out how to compute the basic gain. Regulation 85Z2 sets out the no gain/no loss basis. Regulation 85Z3 modifies certain provisions of TCGA 1992 in relation to disposals of units in FINROFs. Regulation 85Z4 provides that if the effect of a computation under the earlier regulations in this Chapter would produce a loss, the basic gain on the disposal is nil.

Chapter 7 deals with the deduction of income gains in computing chargeable gains. Regulation 85Z5 sets out the scope of Chapter 7. Regulation 85Z6 explains how to compute the chargeable gain for the purposes of TCGA 1992. Regulations 85Z7 and 85Z8 modify sections 162 and 128 of TCGA 1992 for the purposes of disposals to which Part 6A applies.

Chapter 8 deals with leaving the FINROF regime. Regulation 85Z9 requires the manager of the FINROF to make an election for Part 6A to cease to apply to the fund. Regulation 85Z10 requires the legal owner of the fund to notify the participants in the fund that Part 6A no longer applies to it. Regulation 85Z11 provides that Part 6A continues to apply to a participant unless the participant makes an election for a deemed disposal.

Regulation 22 amends the index of defined expressions in Part 2 of the Schedule to the principal Regulations.

Regulation 23 makes consequential amendments to the principal Regulations.

Regulations 24 to 26 make transitional provisions.

Regulation 27 makes a consequential amendment to the Offshore Funds (Tax) Regulations 2009 to ensure that a FINROF does not incur tax liability under those Regulations.

A full and final Impact Assessment has not been produced for this instrument as a negligible impact on the private or voluntary sectors is foreseen.