PAIFs and Corporate Streaming

I was talking to someone who specializes in the taxation of collective investments who made a small but important point on life insurance companies investing in PAIFs that I had not previously appreciated.

In my post of 30th July I suggested that the proposed abolition of corporate streaming if implemented would make PAIFs an attractive vehicle for a life insurance company's pension assets.  However, what I hadn't appreciated was that if a life company does invest in a PAIF it will generally invest via a feeder unit trust.  I think this is something to do with a rule that prevents any company having a more than 10% holding in a PAIF which does not apply to feeder funds.

The  tax analysis of the feeder fund under current legislation is as follows.  The feeder fund will receive dividends from the PAIF that are taxable.  However, when the feeder fund in turn pays a dividend to the life company investor this will be streamed and will therefore be UFII with an amount of notional income tax that can be recovered / offset.  This ensures that pension business policyholders do not have to absorb the inappropriate tax charge that occurs in the feeder fund.  However, if the streaming rules are abolished then dividends from the feeder fund will cease to be UFII and the feeder fund tax charge will fall on pension business policyholders.

It seems that HMRC's proposals to abolish corporate streaming are being opposed by a number of industry groups.  If HMRC do decide to proceed with this pet project despite this opposition then at a minimum it will need to amend the 10% rule so that life company investors can invest directly in a PAIF without the insertion of a feeder fund.