IFM02222 - Authorised investment funds (AIFs): taxation of funds: interest distributions
SI2006/964 Regulation 18 - treatment of interest distributions
For distribution periods ending on or after 1 April 1996 the authorised investment fund may show the whole of its income available for distribution to unit holders as yearly interest (an interest distribution) only if it satisfies the qualifying investments test (IFM02224) throughout the distribution period. Where the qualifying investments test is not satisfied the whole of the income available for distribution to unit holders has to be shown as available for distribution as dividends.
In the hands of investors the distribution is treated in the same way as interest received by them. For IT payers see IFM03350 and for CT payers see IFM03322.
Deduction of IT at source prior to 6 April 2017
An interest distribution is treated as a payment of yearly interest. Prior to 6 April 2017 income tax had to be deducted by the fund in accordance with section 874 of the Income Tax Act 2007 (ITA) when payment was made to the unit holder unless the payment fell within the gross payment category. The fund accounted for the tax deducted on forms CT61 in the usual way. The requirement to deduct tax was removed by the insertion of sections 888C and 888D by section 11 and Schedule 5 of the Finance Act 2017.
Payments without deduction of tax
Prior to 6 April 2017, some investors were entitled to receive payments of interest distributions without deduction of tax (gross payments) - see IFM02800 onwards.
From 6 April 2017, all yearly interest paid by AIFs should be paid without deduction of tax.