IFM03320 - Authorised investment funds (AIFs): taxation of investors within the charge to CT: dividend distributions

Special treatment – known as “corporate streaming” – is provided for dividend distributions in the hands of investors in authorised investment funds (AIFs) when they are within the charge to corporation tax (CT). The treatment applies to all companies and other bodies within the charge to CT. It was originally intended to prevent companies liable for the full rate of CT from reducing their tax bill by channeling some types of investment (such as bonds) through AIFs. This could otherwise have enabled them to receive dividend income that would have borne tax in the AIF at only the lower rate of IT. In recent years the rate of CT has been similar to the rate of tax applicable to AIFs, so the primary benefit of these rules has been to ensure investors within the charge to CT pay the right amount of tax on income from AIFs. Exempt investors are unable to reclaim tax paid within the AIF.

If the investor is itself an AIF then this special treatment applies as AIFs are within the charge to CT.

Corporate streaming – Regulations 48 to 50 of SI2006/964

When a dividend distribution is made, then in the hands of an investor within the charge to CT part of the distribution is treated as unfranked. The unfranked part of the distribution is treated, in the hands of the investor, as an annual payment received after deduction of IT at a rate equal to the basic rate of income tax (regulation 48). The regulations still use the term “unfranked” to refer to income to the AIF which has not itself derived from corporate dividends.

The remaining (franked) part of the dividend distribution is treated by the recipient in the same manner as applies for other UK company dividends.

The calculation of the unfranked part of the dividend distribution is set out in Regulations 49 and 50. The purpose of the calculation is to ensure that the investor’s share of unfranked income arising to the AIF is not treated as dividend income in the hands of the investor.

Regulations 48A and 48B ensure that so much of the unfranked part as relates to foreign income remains characterised as foreign income for investors.