IFM04330 - AIFs: Property authorised investment funds (PAIFs): tax treatment of PAIFs and distributions: calculation of the net income for the residual business

The income of the residual business is any income of the PAIF apart from that part of it that relates to the tax-exempt business.

To calculate the net income of the residual business (regulations 69Z2 and 69Z3 SI2006/964):

  1. Start with the net income of the PAIF (see IFM04320).
  2. Deduct the net income of the tax-exempt business (see IFM04320).
  3. Deduct any amounts (not already deducted in calculating the net income of the PAIF) allowed by the Corporation Tax Acts (including any income from UK dividends).
  4. The result of this calculation is called the “pre-distribution amount”. The pre-distribution amount is the amount that must be distributed as PAIF distributions (interest) – see IFM04370.
  5. Finally, deduct the amount attributed to PAIF distributions (interest).

If the result of the calculation comes to nil, it does not automatically mean that there will be no charge to corporation tax. The residual business of the PAIF can incur a tax charge in one or more of three different ways:

  • distribution to, or in respect of, a holder of excessive rights (regulation 69Z12 SI 2006/964). Where the PAIF has made such a distribution (see IFM04340) and the PAIF has not taken reasonable steps to prevent this occurring (see IFM04170) then the PAIF will incur a corporation tax charge in accordance with the calculation set out in this regulation;
  • excessive financing costs in the case of a PAIF that is also a qualified investor scheme (regulation 69Z9 SI 2006/964) - See IFM04350; or
  • any tax assessed to the PAIF under regulation 69Z10 SI 2006/964. This is an anti-avoidance rule and will only apply when a PAIF does something designed to obtain a tax advantage for itself or another person. See IFM04360.