REV BN 03: ISA And Child Trust Funds: All FSA Authorised Or Regulated Retail Investment Schemes Will Be Qualifying Investments

Who is likely to be affected?

1. The providers of FSA authorised collective investment schemes and Individual Saving Account (ISA) and Child Trust Fund (CTF) account holders who invest in them.

General description of the measure

2. This announcement means that the Government will extend the ISA and CTF qualifying investment rules to include all retail collective investment schemes authorised by the FSA, both UCITS and non-UCITS retail schemes, provided they do not restrict savers ability to access their savings. Schemes applying the ‘limited
redemption’ rule, introduced by the FSA, will not be eligible.

3. In addition to enable similar overseas schemes to compete within the ISA and CTF markets we shall extend the ISA and CTF to any similar overseas non- UCITS retail scheme, provided it is regulated by the FSA.

4. As now any collective investment scheme allowed into the ISA will also be subject to a ‘cash-like’ test, to limit those promising cash-like returns on investment to the cash component of the ISA.

5. The legislation for the ISA and CTF currently limits the types of collective investment scheme that can be held within an ISA or CTF account to certain types of retail investment scheme authorised by the FSA or schemes authorised in another European country that satisfy the EU UCITS Directive rules.

6. The UK schemes are all defined by reference to the relevant FSA sourcebook for collective investment schemes. There are currently two FSA sourcebooks in operation:

  • the old FSA sourcebook for collective investment schemes, the CIS Sourcebook, which will cease to apply in February 2007; and Page 2 of 3
  • the new FSA sourcebook, the COLL Sourcebook.

7. Under the CIS sourcebook four different types of scheme could qualify for the ISA and CTF – the UCITS scheme, warrant schemes, securities schemes or a fund of fund scheme that invests in other UCITS, warrants or securities schemes.

8. Under the COLL sourcebook that will replace the CIS sourcebook in 2007 only two types of retail scheme will remain:

  • ‘UCITS’ schemes, which are very similar in nature to the CIS sourcebook UCITS scheme; and
  • ‘non-UCITS retail’ schemes, which have slightly more relaxed investment rules and allows schemes to invest in a wider range of investment products than the UCITS scheme, such as real property.

9. Currently only the COLL UCITS scheme is allowed into the ISA, and it is intended that they will also be allowed into the CTF.

10. Existing Fund of Fund schemes that qualify for the ISA and CTF under the CIS sourcebook, may not necessarily fall within the definition of a COLL UCITS. In addition, with the extension of the stocks and shares ISA component to include stakeholder products and life insurance from April 2005, it no longer makes sense to exclude authorised collective investment schemes that invest in certain types of investment product, such as real property.

Operative date

11. The measure will take effect from 6 April 2006 at the latest.

Current law and proposed revisions

12. The current ISA qualifying investment rules are set out in regulations 7 and 8 of the Individual Savings Account Regulations 1998. Regulation 7 (2) lists the types of investments allowed within the stocks and shares component of the ISA and regulation 7(15) sets out the cash-like test that will be applied to authorised collective investment products. Products failing the test will be eligible investments for the cash component in Regulation 8.

13. The current CTF qualifying investment rules are set out in regulation 12 of the Child Trust Fund Regulations 2004.

14. Extending the list of qualifying investments to include COLL sourcebook UCITS and non-UCITS retail schemes will mean adding these to regulation 7 with effect from April 2006 and applying Regulation 7(15) to those products for ISA purposes. For the CTF this means adding these products to regulation 12.

Further advice

15. If you have any questions about this change, please contact David Ensor at Capital and Savings, on 020 7147 2835 or email at david.ensor@ir.gsi.gov.uk Information about Budget measures is available on the Inland Revenue website

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