IFM02260 - Authorised investment funds (AIFs): taxation of funds: investment transactions

SI2006/964 Regulation 14E - ‘investment transactions’ of diversely owned funds

Regulation 14E provides that certain financial transactions carried out by diversely owned authorised investment funds (AIFs) are always investment transactions for tax purposes. This rule gives diversely owned AIFs certainty.

The rule applies where an AIF:

  • carries out an ‘investment transaction’ (see below) in an accounting period; and
  • meets the genuine diversity of ownership condition (see IFM17000) throughout that period.

An AIF meeting those two conditions is a ‘diversely owned AIF’.

Where regulation 14E applies, all capital profits, gains or losses arising from ‘investment transactions’ are treated as non-trading and the corporation tax provisions under which trading profits and losses are computed and charged do not apply to those transactions.

Capital profits, gains and losses for this purpose are any profits, gains or losses treated as capital for accounting purposes under the Statement of Recommended Practice (SORP) which applies to AIFs.

Investment transactions

Investment transactions are those specified in regulation 2 of the Investment Transactions (Tax) regulations 2014 (SI 2014/685) – known colloquially as “the investment transactions list”. See IFM18000.

Capital and revenue

Regulation 14E prevents capital gains being re-characterised as trading profits but it does not prevent revenue profits from investment transactions being taxable as income. For example, interest receivable in respect of a loan relationship will be taxable as income even where regulation 14E would apply to prevent any capital profit on disposal of the loan relationship being characterised as the profits of a trade.

AIFs and trading

Where regulation 14E does not apply, it remains a question of fact whether or not activities carried out by an AIF amount to trading for tax purposes. Normal principles apply to determine whether or not there is a trade (see the Business Income Manual).