IFM02224 - Authorised investment funds (AIFs): taxation of funds: interest distributions - qualifying investments test

SI2006/964 Regulations 19 to 21 - test for making an interest distribution

This test must be satisfied by any authorised investment fund (AIF) in order to make an interest distribution. An AIF satisfies the qualifying investments test if at all times throughout the distribution period the market value of its qualifying investments exceeds 60% of all its investments.

The list of qualifying investments is set out in full at Regulation 20 (as qualified by Regulation 21). The qualifying investments either yield interest or, whilst not being interest, give returns whose economic substance is of a similar nature.

Qualifying investments may include units in another AIF or offshore fund but only if that AIF or offshore fund would itself satisfy the 60% test without counting any investments it (the second AIF or the offshore fund) may have in a third AIF or another offshore fund as being qualifying investments.

The term ‘investment’ does not, however, include cash on hand which has not yet been invested.

Qualifying investments for the purpose of this test include units in an offshore fund but not in an unauthorised unit trust.

Alternative finance arrangements

Alternative finance arrangements as defined in Part 10A of the Income Tax Act 2007 are qualifying investments for the purpose of Regulation 20. A distribution derived from these investments may be treated in the same ways as one derived from interest bearing investments.