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Investment trusts - Technical Note

Draft regulations - approval of companies as investment trusts and the treatment of transactions entered into by investment trusts

Background

Finance (No 3) Bill 2010 inserts into Chapter 4 of Part 24, and new Chapter 3A of Part 13, of the Corporation Tax Act 2010 (CTA 2010) regulation making powers under which provision is made for the approval of companies as investment trusts and the treatment of specified transactions by investment trusts. The legislation is at Clauses 49 and 50 of the Bill respectively.

Legislative context

Clause 49 introduces a new meaning of 'investment trust' at section 1158 which contains certain conditions to be satisfied, and provides powers for HM Treasury (HMT) to make regulations to deem conditions A and B to be satisfied in particular circumstances. It also provides powers for HMT to amend sub-sections 1158(3) and (4), and to make regulations dealing with the approval of companies as investment trusts. The primary legislation and the regulations will have the effect that only companies that meet (or are deemed to meet) the conditions in section 1158 and that have been approved by HM Revenue & Customs will be eligible for the exemption from Corporation Tax on chargeable gains provided by section 100 of Taxation of Chargeable Gains Act 1992.

Clause 50 provides powers for HMT to make regulations setting out how specified transactions are to be treated for tax purposes. The regulations are intended to provide certainty to investment trusts that the transactions in question will be treated as investment and not trading transactions, and the draft regulations are similar to those contained in SI 2009/3001 and SI 2006/964, which relate to UK authorised investment funds and offshore funds and are commonly referred to as the 'white list'.

The draft regulations published today contain the regulations relating to conditions A and B, the approval of companies as investment trusts and the treatment of specified transactions.

Policy background

A consultation on changes to the tax rules for investment trusts was published on 27 July 2010, and a summary of responses was issued on 9 December 2010. See below for links to these documents:

Investment trust companies - consultation document

Summary of responses issued on 9 December 2010 (PDF 140K)

The Government stated that it was seeking to introduce rules that facilitate modern investment practice and a wider range of investment strategies, to be achieved by:

  • introducing a new spread of risk test to replace the current restrictions when investment trust companies invest in other companies
  • providing certainty on which transactions are treated as investment for tax purposes
  • removing the annual approval process
  • introducing greater flexibility into the regime by removing the 'cliff edge problem' that arises from fixed percentage conditions

But at the same time:

  • ensuring that UK investors continue to make investment choices for commercial rather than tax reasons
  • preventing unintended tax advantages being gained through investing in an investment trust companies rather than direct investment
  • implementing any new tax rules at no overall increase in cost to the UK Exchequer

These draft regulations, together with Clauses 49 and 50, introduce the changes intended to implement those objectives.

Read the draft regulations (PDF 84K)

Comments on the draft regulations should be emailed to the following HMRC contacts by 24 June 2011:

Wayne Strangwood

John Buckeridge

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