Definition of investment companies and companies with investment business

By Tolley in partnership with Jackie Barker of Wells Associates
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The following Corporation Tax guidance note by Tolley in partnership with Jackie Barker of Wells Associates provides comprehensive and up to date tax information covering:

  • Definition of investment companies and companies with investment business
  • Introduction
  • Companies with investment business
  • Definition of investment company pre FA 2004

This guidance note provides an overview of what constitutes an investment company and a company with investment business for taxation purposes.

Introduction

The distinction between trading and investment companies is important because the rules relating to the types of expenses which are allowable differ. Investment companies deduct management expenses incurred in managing investments which are not relieved elsewhere from their total income. Further information regarding these types of expenses can be found in the Management expenses guidance note. The options for relieving excess management expenses also differ from trading loss relief, see the Excess management expenses guidance note.

Until 31 March 2004, an investment company was defined as ‘any company whose business consists wholly or mainly in the making of investments and the principal part of whose income is derived therefrom’. This definition is still relevant for certain purposes and is considered in further detail below.

ICTA 1988, s 130

A company which carried on a trade and also held investments was unlikely to qualify as an investment company under this definition as it would not meet the ‘wholly or mainly’ rule, or condition that the principal part of its income was derived therefrom. Therefore, any management expenses that were incurred could not be deducted against the company’s total income. In order to ensure that a company could obtain relief as appropriate, with effect from

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