Budget Notes

BN33 FUNDS OF ALTERNATIVE INVESTMENT FUNDS

Who is likely to be affected?

1. Authorised investment funds (AIFs) that take advantage of proposed new Financial Services Authority rules for Funds of Alternative Investment Funds (FAIFs) to invest mainly in non-qualifying offshore funds, particularly those with exempt or corporate investors; and investors in those funds which enter the "Tax FAIFs" regime.

General description of the measure

2. Regulations will be laid to provide an additional tax regime for AIFs which invest into non-distributing offshore funds. The regulations have been drafted to remove tax as a barrier to the introduction of the new Financial Services Authority ('FSA') regulatory regime titled 'Funds of Alternative Investment Funds'. The changes will enable certain funds to elect for a tax treatment as "Tax FAIFs", which will move taxation on offshore income gains from the fund to its investors.

Operative date

3. The changes will have effect on and after a date to be set by Treasury order, the date to be determined by the date the FSA regulatory changes become effective.

Current law and proposed revisions

4. Under the current regulations:

•    a gain made by an authorised investment fund on disposal of an interest in a non-qualifying offshore fund is an offshore income gain and will be subject to corporation tax in the fund; and

•    when an investor realises a gain by disposing of units in the fund then they may also be taxable on a capital gain.

5. Under the proposed new regulations:

•    in the case of an authorised investment fund electing for the new tax treatment, the fund will be exempt from tax on offshore income gains; and

•    an investor in a FAIF that had so elected would then be chargeable solely to income tax on any gain made on disposal of units in the fund.

6. A Tax Framework document was published on the HM Treasury website on 22 February 2008 and draft regulations have been published today on the HM Revenue & Customs website.

Further advice

7. If you have any questions about this change, please contact John Buckeridge on 020 7147 2560 (e-mail: john.buckeridge@hmrc.gsi.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk