Stamp Taxes - Customer Newsletter - Stamp Duty Reserve Tax (SDRT) - Issue no.7 - Unit Trusts/OEIC mergers

Stamp Duty Reserve Tax and Stamp Duty: amalgamations and mergers of Unit Trusts and open-ended investment companies: effect of Save & Prosper Securities Ltd v. CIR (Sp.C 251)

Background

Since August 2000, the Inland Revenue has, on a number of occasions, been asked to consider whether the scope of the Special Commissioners’ decision in Save & Prosper Ltd. v. CIR extends to situations other than that with which that case was immediately concerned (namely, the amalgamation of two authorised unit trusts with a common trustee and manager).

This newsletter sets out the Revenue’s view, following the Special Commissioners’ decision, of the stamp duty and stamp duty reserve tax (SDRT) implications of various other mergers and reconstructions involving UK authorised unit trusts and open-ended investment companies.

The Save & Prosper case

Save & Prosper Income Units and Save & Prosper UK Equity Income Fund (both authorised unit trusts with a common trustee and manager) amalgamated on 13 December 1996.

The Inland Revenue argued that a Stamp Duty Reserve Tax (SDRT) charge had arisen under Section 87 Finance Act 1986. This section applies where one person agrees with another to transfer chargeable securities for money or money’s worth. In this case the Revenue argued that an agreement had been made between the unit holders of the discontinuing scheme and the Appellant (the trustee and fund manager of the continuing scheme) to transfer chargeable securities (the discontinuing scheme investments) in consideration of the issue of units in the amalgamated scheme.

The Special Commissioner (Dr A N Brice) held that:

  • no ‘agreement’ was made between the unit holders of the discontinuing scheme and the Appellant. The amalgamation was a scheme of arrangement which took effect by operation of law, under the terms of the trust deed of the discontinuing scheme, the Financial Services Act 1986 and the Financial Services (Regulated Schemes) Regulations 1991. Accordingly, the amalgamation did not take effect as an agreement between the parties.
  • there was no ‘transfer’ of units in the discontinuing scheme to the unit holders of the enlarged scheme. The units in the discontinuing scheme were surrendered in return for new units in the (enlarged) continuing scheme.

Wider Implications

The Inland Revenue accepts, following the Special Commissioner’s decision in Save & Prosper, that in the following circumstances section 87 Finance Act 1986 will not normally impose a charge to SDRT, provided that the transaction in question takes place under a scheme of arrangement which has effect by virtue of section 251 of the Financial Services and Markets Act 2000, or regulation 21 of the Open-ended Investment Companies Regulations 2001 (SI 2001/1228), and the appropriate section of the Financial Services Authority Handbook (which for this purpose has replaced the Financial Services (Regulated Schemes) Regulations 1991).

Authorised Unit Trusts (AUTs)

  • Where an AUT amalgamates with another AUT. This is the case whether the two AUTs share the same manager or trustee, or they have separate managers or trustees.

Sub-funds of AUTs

  • Where two sub-funds of a common AUT merge.
  • Where one or more sub-funds of one unit trust merge with a sub-fund of a different unit trust with the same manager or trustee.
  • Where one or more sub-funds of one unit trust merge with a sub-fund of a different unit trust with a different manager or trustee.

Partitions

  • where part of the investments of an AUT or a sub-fund of an AUT are merged with the investments of another AUT or a sub-fund of that AUT.

Open-ended investment companies (OEICs)

  • Where an OEIC merges with another OEIC. This is the case whether they have the same manager or depository, or different managers or depositories.

Sub-funds of OEICs

  • Where two or more sub-funds of a common OEIC merge.
  • Where one or more sub-funds of one OEIC merge with a sub-fund of a different OEIC with the same manager or depository.
  • Where one or more sub-funds of one OEIC merge with a sub-fund of a different OEIC with a different manager or depository.

Partitions

  • where part of the investments of an OEIC or a sub-fund of an OEIC are merged with the investments of another OEIC or a sub-fund of that OEIC.

Reconstructions

  • Where a sub-fund of an AUT or OEIC is reconstructed as a separate AUT or OEIC with the same manager, trustee or depository or different managers, trustees or depositories.
  • Where a sub-fund of an AUT or OEIC is reconstructed as a sub-fund of a separate AUT or OEIC with the same manager, trustee or depository or different managers, trustees or depositories.
  • Where the investments of an AUT or OEIC, or a sub-fund of an AUT or OEIC, are split between separate AUTs or OEICs, or separate sub-funds of an AUT or OEIC, with the same manager, trustee or depository or different managers, trustees or depositories.

Any transactions other than those listed above will continue to be dealt with on a case-by-case basis.

SDRT: Schedule 19 Finance Act 1999

Paragraph 2 of Schedule 19 Finance Act 1999 imposes an SDRT charge where a person surrenders units in a unit trust scheme to the manager of that scheme or requires the manager to treat him as no longer interested in units. Para. 18 of Schedule 19 treats each part of an umbrella scheme as a unit trust scheme. Regulations 4 and 4A of The Stamp Duty and Stamp Duty Reserve Tax (Open-ended Investment Companies) Regulations 1997 (SI 1997/1156), as amended, apply these provisions to shares in OEICs in the same way as to units in a unit trust scheme.

We accept that a charge to SDRT under para. 2 of Schedule 19 does not arise in the case of conversions, amalgamations, partitions, or reconstructions of AUTs or OEICs where units or shares in the discontinuing scheme are cancelled and extinguished by the manager to allow the scheme assets to be transferred to the continuing scheme in accordance with the terms of a scheme of arrangement. In this case the unit or shareholders in the discontinuing scheme do not authorise or require the trustee or manager of that scheme to treat them as no longer interested in the units or shares.

Similarly, the issue of units or OEIC shares by the continuing scheme in accordance with the terms of a scheme of arrangement is not regarded as being an issue for the purposes of Schedule 19 Finance Act 1999.

Stamp Duty

Paragraph 1 of Schedule 19 Finance Act 1999 disapplies a stamp duty charge on a transfer or other instrument relating to a unit under a unit trust scheme. However, units in a unit trust are ‘stock’ for stamp duty purposes and, by virtue of para. 1(2), where they form the whole or part of the consideration for a transfer on sale of property other than units under a unit trust scheme, an ad valorem stamp duty charge may still apply. Regulation 4 of SI 1997/1156 applies these provisions to shares in an OEIC.

Following the principles established in Save & Prosper, we accept that an amalgamation, partition or reconstruction of AUTs or OEICs under a scheme of arrangement in the situations set out above will not normally give rise to a transfer on sale and so will not normally attract ad valorem stamp duty. Nor, by virtue of para. 1(1) of Schedule 19, will a fixed £5 stamp duty charge apply to any instrument of title.

Statutory reliefs: SI 1997/1156

Regulations 7-10 of SI 1997/1156 provide statutory reliefs from stamp duty and SDRT on a transfer of fund investments where an authorised unit trust converts to an OEIC, or merges with an existing OEIC.

We accept that units or OEIC shares held as an investment by an AUT or OEIC are “property” or “securities” for this purpose and that the reliefs apply where the transferring fund’s investments include such units or OEIC shares.

CREST Transaction Stamp Status

Where a transfer of securities is undertaken in CREST in consequence of any of the specific transactions referred to above, in accordance with the terms of a scheme of arrangement, CREST TSS value 6 can be used when reporting the transaction. Use of this value will be subject to periodic compliance checks and reviews.

Further enquiries

Requests for advice about cases other than those identified above may be addressed in writing to Inland Revenue Stamp Taxes, Room 131 New Wing, Somerset House, London WC2R 1LB. Please include full details of the transaction concerned.

Please note: Requests for advice about cases other than those identified above should now be addressed in writing to:

HMRC Excise Stamps & Money Businesses
Room 1/38
100 Parliament Street
London
SW1A 2BQ

Note

The appropriate section means section 11.5 of the Collective Investment Schemes Sourcebook (CIS) or section 7.6 of the New Collective Investment Schemes Sourcebook (COLL) introduced by the New Collective Investment Schemes Sourcebook Instrument 2004 (FSA 2004/33).

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