Authorised Investment Funds Tax Treatment

Authorised investment funds (AIFs) offer a way to pool money with other investors and access professionally managed portfolios of shares, bonds, and property. These funds have special tax rules that differ from ordinary investment companies, affecting both the fund itself and how you're taxed on distributions and gains.

What are authorised investment funds?

Authorised investment funds are collective investment schemes regulated by the Financial Services Authority under the Financial Services and Markets Act 2000. When you invest in an AIF, your money is pooled with other investors' assets and invested in a professionally managed portfolio. This might include government bonds (gilts), corporate bonds, quoted shares on the stock exchange, and sometimes unquoted investments or property.

The key benefit is risk reduction through diversification – spreading your investment across many assets means that poor performance of any single investment has less impact on your overall returns.

AIFs can take several forms:

• Authorised Unit Trusts (AUTs) – where you own units in a trust
• Open-ended investment companies (OEICs) – structured as companies with shares that can be created or cancelled based on demand
• Property Authorised Investment Funds – focused on property investments
• Qualified investor schemes – typically for sophisticated investors
• Tax elected funds – funds that have made specific tax elections
• Authorised Contractual Schemes (ACSs) – co-ownership arrangements

How AIFs are taxed

AIFs are treated differently from ordinary companies for Corporation Tax purposes. The fund itself submits Company Tax Returns online and must pay any Corporation Tax due electronically.

The specific tax treatment depends on the type of distributions the fund makes and the nature of its investments. AIFs distribute income to investors, and these distributions are classified differently depending on the underlying income the fund receives.

Interest distributions

Some AIFs make interest distributions rather than dividend distributions. This happens when the fund's income comes primarily from interest-bearing investments like bonds.

UK Income Tax is normally deducted from interest distributions paid to investors. However, special rules apply if you're investing through the fund but not resident in the UK.

Tax treatment for non-UK residents

If you're beneficially entitled to a share of the investments in an AIF and you're not resident in the UK, you can arrange for interest distributions to be paid with no UK tax deducted.

This also applies if you jointly own a share of the fund's investments, provided the other owners (including any companies) are also not UK resident.

Certificates of residence

If you pay UK tax on foreign income and want to claim tax relief in another country, you may need a certificate of residence (CoR) from HMRC. This confirms you're a UK resident under the relevant Double Taxation Agreement.

You can apply for a CoR if:

• You're classed as a UK resident
• There's a Double Taxation Agreement with the country concerned

If you're a fund regulated by the Collective Investment Schemes Centre (CISC), you should complete form CISC9 and send it to CISC. Individual taxpayers apply through their own tax office using HMRC's online form. The standard turnaround time is 15 working days.

Genuine diversity of ownership

AIFs must meet certain conditions to qualify for their special tax treatment. One key requirement is "genuine diversity of ownership" – meaning the fund must be widely held rather than controlled by a small group.

If you need advance clearance from HMRC that your AIF meets the genuine diversity of ownership condition, you can apply using form CISC5.

Tax vouchers for nominee accounts

If you hold your AIF investment through a nominee account (where investments are held in the name of a nominee rather than your own name), consolidated tax vouchers can be issued.

HMRC provides a generic voucher template that nominee account holders can use or adapt. If you use this template, you don't need prior approval from HMRC. If you cannot use the template, you must seek approval for your proposed format from CISC.

Setting up a new fund

To register a new fund and obtain a Unique Taxpayer Reference (UTR), you must complete form CISC10 and send it by post to CISC.

It's important to notify CISC immediately of any changes to the fund, including:

• Name changes
• Address changes
• Changes of agent, trustee, or depositary

Making tax payments

When paying Corporation Tax or other taxes on behalf of an AIF, you must use the exact reference on the HMRC payslip. Each accounting period has a specific reference, and using the wrong one can result in misallocated payments.

If making a single payment covering multiple funds, your covering correspondence must:

• Break down the amount for each fund
• Show the correct payslip number for the relevant accounting period

If you don't have a payslip, quote the accounting period and the UTR in your correspondence and on the reverse of any cheque.

Getting professional advice

The tax treatment of AIFs is complex and depends on the specific structure of the fund, the nature of its investments, and your personal circumstances. If you're a fund manager or have significant investments in AIFs, professional accounting advice is recommended.

Sources

• Authorised Investment Funds
• Authorised Investment Funds: Interest Distributions and Property Income

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.