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Investment Management
Reporting fund status/distributing fund status
New anti-avoidance measures for Authorised Investment Funds
(AIFs)
Real Estate Investment Trusts (REITs) - Stock Dividends
Venture Capital Trusts (VCTs) and Enterprise Investment Schemes
(EISs)s
Tax transparent funds
Funds investing in non-reporting offshore funds (FINROFs)
Modernisation of investment trust companies (ITCs)
Schedule 19 Stamp Duty Reserve Tax (SDRT) - exemption for
investment in Collective Investment Schemes
Alternative Investment Fund Management Managers Directive/UCITS
IV
Banking
Bank Levy
Bank Bonuses
Investment Management
There has been much speculation about this Emergency Budget and
although there has been very little announced of direct relevance
to the industry, changes to the corporate and capital gains tax
rates will have an impact on fund managers and the products that
they manage.
The previous Government made quite significant progress in terms of
engaging with the investment management industry over the last four
to five years, listening to the many concerns and frustrations
voiced by the industry and delivering largely satisfactory
solutions. The new Government has specifically reconfirmed its
intentions to continue working with the industry to improve the
competitiveness of the UK in the asset management sector.
Turning to the developments in this latest Budget statement, the
key items are:
Reporting fund status/distributing fund status
A new 28% rate of capital gains tax for higher and additional
rate taxpayers is substantially less than feared and as such, it is
unlikely to reduce the impetus for those offshore funds with
taxable UK investors to seek reporting fund status.
For investors in reporting funds, any gains realised on disposal of
their interests will be taxed as capital gains, whilst for
investors in non-reporting funds, any gains realised on disposal
will be taxed as income.
Even with the increase in the maximum capital gains tax rate to
28%, this is still significantly lower than the highest marginal
income tax rate and other factors enhance further the
attractiveness of capital treatment, such as availability of the
annual exemption and the ability to offset accrued capital losses
from prior years.
Each case should still be looked at separately, as income from
reporting funds will be taxed at the highest marginal income tax
rate on an annual basis and so, capital gains tax treatment and
annual income tax on reported income needs to be weighed against
the benefit of deferral.
It should also be remembered that for other UK investors, the
capital gains tax treatment may also be beneficial. For example, UK
authorised funds are exempt from tax on capital gains, but not on
income, so the receipt of capital gains is still likely to be
preferred in such instances.
It is worth mentioning that following the issue of final guidance
on the offshore funds rules in May 2010, HM Revenue & Customs
(HMRC) has confirmed that it will accept late applications for
reporting fund status for funds, provided that such applications
are submitted by 30 June 2010.
New anti-avoidance measures for Authorised Investment Funds
(AIFs)
Two new anti-avoidance measures have been introduced to ensure
that corporate investors in AIFs are no longer in a position to
create a credit for UK tax through distributions received from an
AIF where no UK tax has been suffered by the AIF.
The first amendment will have an impact on AIFs which satisfy the
qualifying investments test (ie bond funds). Under the current
rules, an AIF which satisfies the qualifying investments test is
able to make an interest distribution if it meets the test at all
times throughout the distribution period. The anti-avoidance
measure restricts the corporation tax deduction given for interest
distributions so that the deduction is available only to the extent
that the distribution is derived from income from qualifying
investments (eg cash and bonds). No corporation tax deduction
will be given for interest distributions that derive from dividends
exempt from corporation tax.
In practice, the proposal should not result in an additional tax
charge at the AIF level as UK and most foreign dividends would be
exempt from corporation tax as a result of the changes to the
taxation of foreign profits introduced on 1 July 2009. However, the
measure has effect for distributions made on and after 22 June 2010
and there will be additional complexity when preparing corporation
tax computations for AIFs in terms of 'streaming' income from
qualifying investments and other income at the fund level.
The second amendment is aimed at preventing the conversion of
foreign tax suffered by AIFs into deemed tax credits in the hands
of corporate investors (including another AIF). It is proposed that
where an AIF receives a portion of its income from foreign income,
a proportional part of the deemed tax credit is treated as a
foreign tax credit for all tax purposes in the hands of the
corporate investor. The proposed changes should only have an impact
on corporate investors in AIFs that elect to tax their foreign
dividends. This measure comes into effect today.
Real Estate Investment Trusts (REITs) - Stock Dividends
Legislation will be introduced in the next Finance Bill allowing
REITs to issue stock dividends in lieu of cash dividends for the
purposes of meeting the requirement to distribute at least 90% of
profits from the REIT's property rental business. This will have
effect for property income distributions made on or after the date
that the Finance Bill receives Royal Assent, which will be after
the summer recess.
This measure was originally mentioned in the Budget on 24 March
2010.
Venture Capital Trusts (VCTs) and Enterprise Investment Schemes
(EISs)
The four proposed changes to the VCT regime, introduced as a
condition for their approval by the European Commission and as
mentioned in the Budget Statement of 24 March 2010 will also be
introduced in this Finance Bill.
Other issues:
The Government today confirmed that it will hold discussions with
the industry and consult on a range of issues to improve the
competitiveness of the UK in the asset management sector.
In particular, the following areas have been specifically
mentioned:
Tax transparent funds
As announced in the previous Budget, the Government intends to
work with the funds industry to develop a tax transparent fund
regime to help level the playing field with jurisdictions such as
Ireland and Luxembourg.
Funds investing in non-reporting offshore funds (FINROFs)
This legislation came into force on 6 March 2010 and the
Government has today reconfirmed a commitment to continue working
with the industry to address various issues as they arise now that
the legislation is active, especially around the issue of 'mixed
funds' ie funds which have investments in reporting offshore funds
and in non-reporting offshore funds.
Modernisation of investment trust companies (ITCs)
The previous Government signalled an intention to review current
tax legislation for ITCs in order to modernise the regulations and
this intention has been reaffirmed by the current Government.
A consultation document was planned for issue in summer 2010 and we
await further developments in this area.
Schedule 19 Stamp Duty Reserve Tax (SDRT) - exemption for
investment in Collective Investment Schemes
A similar commitment from the current Government to work with
the funds industry to exempt certain investments from a charge to
SDRT under Schedule 19 has been reiterated.
Alternative Investment Fund Management Managers Directive/UCITS
IV
The Government also confirmed that it will continue to push for
a workable outcome on the EU Alternative Investment Fund Management
Manager Directive, as well as continuing discussions and
consultation on the implementation of UCITS IV.
Banking
Banking has proved to be an area of great interest to the
Chancellor, not surprisingly, in view of the integral involvement
of the sector in the global financial crisis.
As a result, the Chancellor has proposed several measures, in order
to force banks to become more accountable and responsible in their
operation, as follows:
Bank Levy
The Chancellor announced that the Government will introduce,
from 1 January 2011, a bank levy intended to encourage banks to
move to less risky funding profiles and to ensure that they make a
fair contribution in respect of the potential risks they pose to
the UK financial system and wider economy.
The levy will apply to:
- The consolidated balance sheet of UK banking groups and
building societies
- The aggregated subsidiary and branch balance sheets of foreign
banks and banking groups operating in the UK
- The balance sheets of UK banks in non-banking group
The levy will be based on total liabilities (both short and long
term), where the aggregate liabilities of the affected institutions
and groups amount to £20 billion or more, excluding:
- Tier 1 capital
- Insured retail deposits
- Repos secured on sovereign debt
- Policyholder liabilities of retail insurance businesses within
banking groups
In calculating branch liabilities, the proposal is to use the
existing principles applied to the capital attribution methodology
used for corporation tax purposes.
The proposal is for the levy to be set at 0.07%, with a lower rate
of 0.04% for 2011. In addition, there will be a reduced rate for
longer -maturity wholesale funding (funding with more than one year
remaining to maturity) of half the main rate, being 0.02% for 2011
and 0.035% thereafter.
The levy will not be deductible for corporation tax purposes and
there will be anti-avoidance measures to prevent avoidance. The
levy will be administered by HMRC.
The Government will consult with the industry over the summer and
the final details of the levy will be published later in the year,
following this consultation. Amongst the issues, which will need to
be considered, are:
- the competitiveness of the UK banking sector as compared to
other jurisdictions, although this was in some way mitigated by the
fact that a joint statement was made with France and Germany today,
who are proposing to introduce a similar levy. This approach is
also in line with a previous proposal made by President Obama in
the USA;
- how to obtain relief for double (or greater) taxation as
existing Double Taxation Treaties would not permit relief for such
a levy based on balance sheet liabilities. For example, based on
the US proposals the London subsidiary of a US bank would be taxed
twice, both in the UK and the US; and
- the potential tension with regulatory capital requirements,
since a levy on non-insured liabilities might encourage a bank to
hold more Tier 1 capital, which in turn could permit banks to hold
riskier assets.
Bank Bonuses
In addition to the proposals for a bank levy, the Chancellor
announced that the Government is taking action to tackle
unacceptable bank bonuses.
The Independent Commission on Banking is to look at measures to
reform the banking system and promote competition. The Government
will consult on a remuneration disclosure scheme and working with
international partners will explore the costs and benefits of a
Financial Activities Tax, based on the profits and remuneration of
financial organisations.
The Government has also asked the Financial Services Authority to
consider a number of factors in its forthcoming review of its
Remuneration Code.