Stamp Taxes Customer Newsletter

Stamp Duty Reserve Tax (SDRT) regime for Unit Trust and OEIC Monthly Notices

Subject: Exempt Investments

Background

On 1 September 1999, Stamp Taxes published initial guidance in relation to the Stamp Duty Reserve Tax regime for surrenders of units in unit trust schemes and shares in open-ended investment companies (OEICs). Paragraphs 32 to 38 of the guidance provided unit trust managers/OEIC Authorised Corporate Directors with assistance in determining whether an investment held by the fund should be classified as an ‘exempt investment’ for the purposes of applying the formula in paragraph 5 of Schedule 19 FA 1999. That paragraph provides a proportionate reduction of the SDRT charge by reference to the nature of the assets held by the fund.

Further clarification on the classification of investments has been requested by fund managers in respect of various types of investment held by a fund, and this Newsletter sets out HM Revenue and Customs’ view as to whether these are to be regarded as exempt or non-exempt investments

Sections 99(5A)(b) & 99(5B) Finance Act 1986 provide rules for determining when an investment is regarded as exempt and differ for:

  • investments that are holdings in other collective investment schemes (such as unit trusts or OEICs), and
  • direct investments held other than in unit trusts and OEICs.

Investment holdings in other collective investment schemes

An investment in a collective investment scheme such as a unit trust and OEIC is to be regarded as an exempt investment if, and only if, all of the following conditions apply:

  • The underlying collective investment scheme is itself an authorised unit trust scheme or a UK-incorporated OEIC,

and

  • that scheme does not permit investment that allows income to arise to the trustees or the company that will be chargeable to tax in their hands otherwise than under Case III of Schedule D,

For example, where the terms of the underlying collective investment scheme only allow investment in UK or non-UK bonds and/or gilts, any interest or investment held in that scheme can be regarded as being an exempt investment. But, where the terms of the underlying scheme permit investment in, say, UK or non-UK registered stocks and shares, or a mixture of bonds, gilts and UK/non-UK registered stocks and shares, an interest in the scheme is regarded as being a non-exempt investment,

and

  • the terms of the scheme permit only investment in assets the transfer of which would not be chargeable to ad valorem stamp duty and which do not represent chargeable securities for the purposes of SDRT.

For example, transfers of gilts, bonds and most forms of loan capital as defined in section 78(7) Finance Act 1986, are not chargeable to ad valorem stamp duty. Similarly the provisions of section 99(5) Finance Act 1986 preclude a charge to SDRT on transfers of securities that are exempt from all stamp duty. But, the stamp duty and SDRT exemption does not apply to transfers of loan capital which,

  • at the time the instrument is executed, carries a right (exercisable then or later) of conversion into shares or other securities, or to the acquisition of shares or other securities including loan capital of the same description, or
  • at the time the instrument is executed or any earlier time, carries or has carried a right to interest or repayment as defined under section 79(6) Finance Act 1986.

All of the above conditions must be fulfilled for an investment to be considered an ‘exempt investment’.

Direct investments held by a fund other than interests in collective investment schemes

Investments in convertible loan capital

Whereas transfers of most forms of loan capital, as defined in section 78(7) Finance Act 1986, are exempt from stamp duty and SDRT, the exemption does not apply to an instrument transferring loan capital which:

  • at the time the instrument is executed, carries a right (exercisable then or later) of conversion into shares or other securities, or to the acquisition of shares or other securities including loan capital of the same description, or
  • at the time the instrument is executed or any earlier time, carries or has carried a right to interest or repayment as defined under section 79(6) Finance Act 1986.

In this situation, the holding of any UK registered convertible loan capital that fits the above description is to be classified as a non-exempt investment.

Investments in Depositary Interests

Depositary Interests are UK registered securities that enable trading in non-UK incorporated and registered company shares to be undertaken and settled within the UK in electronic/paperless form (such as CREST). A UK depositary interest in foreign securities is a chargeable security for the purposes of a charge to SDRT. The Stamp Duty Reserve Tax (UK Depositary Interests in Foreign Securities) Regulations 1999 (section 119 Finance Act 1999 & SI 1999/2383 (as amended by SI 2000/1871 and SI 2001./3779)) however, afford relief from SDRT if, and only if, all of the qualifying conditions detailed in the regulations are fulfilled.

Provided that all of the qualifying relief conditions are met, the holding of a depositary interest can be classified as an exempt investment.

Shares in a non-UK incorporated and registered company and depositary interests of the same class of security in the underlying company are generally identified by a common ISIN (International Securities Identification Number), so care is required to ensure that holdings are correctly classified.

Investment in non-UK incorporated companies with a UK register

Securities issued or raised by a company incorporated outside of the UK that are registered in a register that is kept in the UK by the company are ‘chargeable securities’ for SDRT purposes. Accordingly, interests in, or other rights in, such an investment held by a fund rank as non-exempt investments for the purposes of Schedule 19 Finance Act 1999.

Investments in derivatives including options

The SDRT charge arising on the value of surrendered units and OEIC shares to the fund manager or trustees can be reduced if, in the relevant two-week period, the fund property is invested in both exempt and non-exempt investments by applying the fraction N/(N+E).

Where a fund’s investments include derivative holdings i.e. options, futures, forward contracts etc, each individual derivative, for the purpose of the SDRT monthly notice, is to be valued by reference to the open market value or price rather than on any other valuation basis. Derivatives that are not attractive to potential purchasers, being of no intrinsic value or of negative worth, will have no market value and therefore a zero value for SDRT.

Where call (buy) and put (sell) options relating to the same underlying property are held as investments of the fund, each should be valued in their own right (with no netting value recorded) as they can be traded independently.

Should you have any enquiries about this Newsletter please telephone 01903 509928.

Please note:
Any enquiries about this Newsletter should now be sent to:

Birmingham Stamp Office
SDRT Team
9th Floor
City Centre House
30 Union Street
Birmingham
B2 4AR

Tel: 0845 603 0135
Fax: 0121 633 3921