IFM06530 - Tax elected funds (TEFs): breaches of conditions: breach of the property condition, the genuine diversity of ownership condition & the scheme documentation condition

Breach of the property condition, the genuine diversity of ownership condition or the scheme documentation condition

If a TEF breaches the property condition, the genuine diversity of ownership condition or the scheme documentation condition (see IFM06130 to IFM06160) then the manager of the fund should follow the process set out in IFM06520.

Consequences of such a breach

If HMRC is content that the breach was inadvertent and that it has been rectified within a reasonable timeframe, then the TEF can continue to remain in the regime – see regulation 69Z66(2). That will not be the case if there are multiple breaches of the same condition (IFM06520) or multiple breaches of separate conditions (IFM06550).

If the breach was inadvertent but not rectified within a reasonable time (see IFM06520) then a termination notice will be issued under regulation 69Z66(3). See IFM06610 for further information on termination notices.

Taxable income that arises from a breach of the property condition

If a TEF breaches the property condition and receives income from a UK or overseas property business as defined in section 205 or 206 of the Corporation Tax Act 2009, the TEF must take action to remedy the breach (that is to dispose of the asset or cease the UK or overseas property business). Until the breach is rectified any income received will be defined as property business income and treated as taxable income as explained in IFM06340.