Listed Investment Companies

Proposals welcomed to provide certainty on UK funds’ tax

HM Treasury released on 16 December 2008 three sets of proposals on fund tax reform and a further consultation on changes to the tax regime for listed investment companies. 

First, there are proposals to provide legislative certainty that UK funds will be treated as investing, not “trading”.  At present there is a small possibility that a particular transaction could be treated as trading, which would lead to the whole fund losing its capital gains tax exemption - a “cliff edge” effect.  The proposals further reduce the likelihood of a transaction being viewed as trading and, importantly, would remove the cliff edge should there be such a transaction.

Secondly, the feedback statement on Tax-Elected Funds (“TEFs”) confirms the government’s commitment to progress the proposals.  The Investment Management Association (IMA) is working with officials on an efficient and operationally practical way of ensuring that investors receive income with the appropriate tax treatment (so-called “income streaming”). 

These two proposals are part of a package that already includes a new tax-efficient property fund regime and a workable regime for Qualified Investor Schemes (QIS).

The third paper, on reform of the Offshore Funds regime, demonstrates that officials have taken on board the IMA’s comments on the draft proposals.  It also consults on which investment vehicles will be deemed to fall within the regime, i.e. what is meant by a “fund”. 

Finally, the feedback statement to the recent consultation on the introduction of “income streaming” for listed investment companies indicates the government’s commitment to progress these proposals. 

Julie Patterson, Director of Authorised Funds and Taxation, said:

“Today’s proposals are a landmark in our discussions with the government on reforms to improve the competitive position of UK funds and to provide certainty for investors.  Together with changes secured last year and further technical amendments contained in amending regulations laid last week, these proposals signal the beginning of the home straight and the success of the IMA’s lobbying.  In particular, the combination of certainty that funds will not be taxed as trading, a workable QIS regime and further progress in the TEF discussions, will provide an attractive regime for institutional investors in the short term.”