IFM06110 - Tax elected funds (TEFs): introduction

A TEF is a specific type of authorised investment fund (AIF). The normal tax rules for AIFs (The Authorised Investment Funds (Tax) Regulations 2006 SI2006/964) apply to TEFs, subject to special rules for TEFs in Part 4B of those regulations. This part of the guidance should be read together with the general guidance on AIFs in this manual.

What is a TEF?

The intention of the TEF tax regime is to move the point of taxation from the TEF to the investor so that the investor is taxed as though they had invested in the underlying assets directly. The regime is likely to be beneficial to funds that invest in a mixed portfolio of assets but do not receive any income directly from a UK or overseas property business. Funds that specialise in property investment may instead use the PAIF regime which is set out from IFM04000.

How does the TEF regime work?

A TEF is required to make two types of distribution, a dividend distribution and a non-dividend distribution. In general all dividend income received by the TEF will be distributed as a dividend distribution and all other income will be distributed as a non-dividend distribution.

Investors in a TEF are taxed as though they have received a dividend and a payment of yearly interest.

Under normal corporation tax (CT) rules income from UK dividends and most foreign dividends is exempt from CT in the hands of the TEF. Any other income (such as interest) will be required to be distributed as a non-dividend, for which the TEF will be entitled to receive a deduction up to the same amount to off-set the taxable income that would ordinarily be liable to CT.

Key features of the regime

The TEF regime is elective and in order to become a TEF an existing or new fund will need to meet certain conditions, which are explained in IFM06120 to IFM06160.

An existing or new fund will need to apply to HMRC and receive approval before adopting the new regime - see IFM06210 to IFM06260.

There are special provisions within the regime that allow a TEF to make tax information available to their investors electronically - see IFM06410.

There are breaching rules and sanctions if any of the conditions of the regime are not met - the guidance on these rules can be found at IFM06500.