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Some entities consist of an over-arching legal entity that contains a number of different sub-divisions that are economically independent of one another. Umbrella funds and cell companies are examples of such entities.

It is likely that separate financial accounts are prepared in respect of a sub-division. Where this is the case, the sub-division will be an entity for MTT purposes, even though each sub-division is not a legal entity.

The over-arching entity will also typically be an entity for MTT purposes, as it will usually be a company. Every company is an entity for MTT purposes.

As a result, a share in a sub-divided entity may simultaneously be an ownership interest in two different entities: the over-arching corporate entity, and the sub-division in relation to which it conveys an economic interest.

See MTT10120 for guidance on the meaning of 鈥榚ntity鈥�.

See MTT10140 for guidance on protected cell companies specifically.

Determining whether a sub-division is an entity

When determining whether a sub-division is an entity for MTT purposes, HMRC takes a broad view of what is meant by an 鈥渁rrangement that results in the preparation of separate financial accounts鈥� in section 231(1) of Finance (No.2) Act 2023.

There does not need to be a statutory obligation to prepare financial accounts. For example, a contractual obligation or other commitment to investors to provide information on the performance of a sub-fund in which they have invested would be sufficient. The routine preparation of accounts without any obligation of any kind to do so could also be sufficient, depending on the circumstances.

It will not matter whether a sub-division鈥檚 accounts are entirely separate from those of the other sub-division, or if they are presented within the umbrella fund鈥檚 accounts. It is only necessary that the sub-division's financial details are readily discernible.

Determining ownership interests

In some MTT provisions, it is necessary for a group to determine the percentage ownership interest held in an entity, as a proportion of all ownership interests held in that entity (see MTT17000+).

Where an ownership interest is held in a sub-divided entity, that interest may effectively be an interest in two different entities: the over-arching entity, and the sub-division.

In most cases, it is the percentage ownership interest in the sub-division that should be considered, as this will normally reflect the commercial reality.

However, in some cases, the entire over-arching legal entity, rather than the separate sub-divisions, is consolidated in the consolidated financial statements. In such a case, it is the percentage ownership interest in the over-arching entity that should be considered.

See MTT21140 for guidance on excluded dividends, including the determination of a portfolio interest.

Example

A Ltd holds an ownership interest in a fund that is a sub-division of an umbrella fund. Consequently, A Ltd has an interest in both the sub-division and the over-arching umbrella fund. It holds around 20% of the interest in the sub-division and a fraction of one percent of the interest in the umbrella fund.

In the consolidated financial statements of A Ltd, the interest held is recognised as being an interest in the sub-division.

A Ltd needs to determine whether its ownership interest constitutes a short-term portfolio holding.

When determining the percentage ownership interest it holds, the entity that should be considered is the sub-division, not the umbrella fund. The ownership interest will therefore not constitute a short-term portfolio interest.

This reflects the economic reality, because each sub-division of the umbrella fund is economically segregated from the others.