Income Tax Act 2007 section 809FZO

Funds of funds

Section 809FZO sets out special rules for how the income-based carried interest provisions apply to "funds of funds" — investment schemes that predominantly invest in other collective investment schemes rather than directly in underlying assets.

• A fund of funds can treat its investment as being in the underlying collective investment scheme itself, without looking through to the underlying assets, provided the arrangement is not designed to reduce the proportion of carried interest treated as income-based carried interest.
• Where a fund of funds holds a "significant investment" (at least £1 million or 5% of external investor capital) in an underlying scheme, special timing rules apply: subsequent qualifying investments are treated as made when the significant investment was first acquired, and disposals are not recognised until a "relevant disposal" occurs.
• To qualify as a fund of funds, a scheme must, at inception, reasonably expect that substantially all its capital will be invested in other schemes (holding less than 50% of each), more than 50% of investments will be held for at least 40 months, and more than 75% of capital will come from external investors.
• An investment only qualifies for the special timing rules if it meets strict conditions: it must be on the same terms as external investors, the fund of funds must hold no more than 30% of the underlying scheme, the management teams must be entirely separate, and the arrangement must not be designed to reward the underlying scheme's managers or circumvent the average holding period test.