IFM03360 - Authorised investment funds (AIFs): taxation of investors within the charge to IT: financial traders and diversely owned AIFs: special rules

SI2006/964 Regulations 52B - 52D

Profits from “investment transactions” accounted for under the heading “net capital gains/losses” in the statement of total return as per the IMA SORP are treated as non-trading profits when carried out by a diversely owned AIF. Special rules are therefore needed to prevent financial traders sheltering profits from these types of transactions in such an AIF. “IMA SORP” refers to the Investment Association’s Statement of Recommended Practice for fund accounting.

Regulations 52B to 52D set out special rules applying to financial traders (see IFM03365) holding units in diversely owned AIFs (see IFM02260). The rules require the financial trader to include in its computation of trading profits for IT purposes:

  • All distributions; and
  • All realised and unrealised gains/losses

in respect of the units in the diversely owned AIF arising in each period of account.

Realised and unrealised gains/losses in a period of account are calculated by reference to the difference between the actual disposal value, or market value at the end of the period of account where the units have not been disposed of, and the market value at the end of the previous period of account, or the acquisition cost if the units were acquired during the period of account.

Market value means the price published by the manager of the AIF on the appropriate day, or nearest preceding day. Where the manager publishes both buying and selling prices, the market value will be the buying price (which will be the lower of the two).

The special rules do not apply where the units in the diversely owned AIF are included in the financial trader’s trading stock and all profits/losses, including distributions, are included in the computation of trading profits on the basis of fair value accounting. This is because in such cases the financial trader will already be recognising the distributions and realised/unrealised gains/losses required by regulations 52B and 52C.