HM Revenue & Customs is widening its anti-avoidance net to take investments by friends and family into account in deciding whether individuals investing in a new, potentially tax-avoiding investment medium, should be subject to anti-avoidance rules.
The new type of authorised investment fund – known as a qualified investor scheme – is being permitted under rules drawn up by the Financial services Authority that permit its sale only to sophisticated and institutional investors.
The fund permits greater freedom in the way assets are invested. Economic secretary Ivan Lewis said that because these features could attract the attention of tax planners who may want to use them to take advantage of beneficial tax treatment under authorised investment fund rules, different tax rules would be applied to investors with ‘substantial’ holdings in a QIS – defined as 10% or more.
Lewis said that in looking at whether an investor had more than 10% of a fund, Revenue & Customs would attribute interests in the same fund ‘held by associates and connected parties (family members, business partners. etc)’ to the investor.
The 10% limit is included in a series of clauses in the Finance Bill, which started its committee stage in the Commons on Monday. The clauses adjust tax law to take into account changes in the FSA’s regulatory regime for AIFs.
One of the changes will allow AIFs to apportion distributable profits to investors as interest and as a dividend. Existing rules allow funds to pay interest or dividends but not both in the same distribution period.
The rules will no longer require funds to prove that 60% of the fund’s assets are interest bearing in order to be able to pay out interest.
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