STSM105070 - Collectives: exemptions: exempt investments - interests in other collective investment schemes - chains of funds

As outlined in STSM105050, an investment in a Collective Investment Scheme is to be regarded as an exempt investment under FA86/S99(5B)(b) if, and only if, both:

  • The underlying scheme is a Collective Investment Scheme as defined in the Financial Services and Markets Act 2000 (FSMA);

and

  • The value of the underlying scheme’s non-exempt investments are no more than 20% of the value of its total investments.

Chains of Funds

There may be situations where a top scheme invests in an underlying scheme that itself invests in other schemes, possibly creating a chain of decreasing transparency. The 20% limit test is determined independently at each level of ownership, and fund managers therefore must not look through the underlying scheme to determine what sort of investments are ultimately held. Rather the units of each underlying scheme in the chain will be exempt or non-exempt depending on what it holds.

The burden of proof, upon any HM Revenue & Customs (HMRC) enquiry or inspection, is on the manager of the top scheme to demonstrate that the investment for which they are claiming an exemption meets the qualifying conditions in accordance with the evidence available. If they are unable to do this, and remain in doubt as to the nature of the underlying scheme’s investments, then they must classify the investment in the underlying scheme as non-exempt.

Avoidance of FA 99 Schedule 19 charge prior ro 30 March 2014

If managers were discovered to be using these provisions to attempt to avoid paying tax under Schedule 19 where it is properly due, HMRC will consider the imposition of penalties in addition to recovering tax and interest payable.

The FA99/SCH19 charge applies only to units and OEIC shares which are surrendered and transferred prior to 30 March 2014. See STSM103005.

See STSM101010 for the meaning of a Collective Investment Scheme.

See STSM101020 for the meaning of a unit trust.

See STSM101050 for the meaning of an OEIC.

See STSM105060 and STSM105080 for further information on Exempt Investments-interests in other Collective Investment Schemes.