Unauthorized unit trusts

HMRC recently published a draft statutory instrument on the taxation of unauthorized unit trusts. ("UUTs")  There is also draft guidance on the new regime which has been around for a while.

Links to the draft statutory instrument and guidance are below

statutory instrument

Guidance

The legislation provides for the rationalization of the existing rules for taxing UUTs and subdivides UUT's into two (strictly speaking three) subcategories; Exempt Unathorized Unit Trusts (EUUTs) and non  - exempt unauthorized unit trusts (NEUUTs).

A few comments on the new regime for the taxation of EUUT and NEUUTs.

An EUUT is one where the trustess are UK resident, where all of the unit holders are exempt from UK capital gains tax (other than by residence) or managers of the fund and the fund is authorized as a EUUT.  There are some quite lengthy rules on the authorization process that I haven't gone into.

One point to note is that the fact that an investor is a life insurer or a friendly society does not prevent a UUT being a EUUT.  This provision is clearly to allow life insurers and friendly societies to invest pension and exempt assets in EUUTs.  In theory I think it would allow BLAGAB assets to be invested in EUUTs but I don't think this would be advisable due to the taxation charge on income of an EUUT (see below).

EUUTs are exempt from tax on capital gains.  The taxation of income is very complex but I think works like this.

• There is a tax charge on income that is a liability of the trustees.  There are all sorts of rules about basis periods and the accrued income scheme that I have not gone into.  

• Where the investors in the EUUT are in receipt of taxable income from the EUUT (see below) then this taxable income is a deduction in the trustees tax computation.  

Accordingly I would envisage that in most cases the trustees liability to income tax will be zero but it might be quite a complicated business getting to that answer.  I think the whole point of the new legislation is to move away from the old system where the trustee would have a liability to income tax but payments from UUT were deemed to be net of basic rate tax as this treatment had been exploited by taxpayers.

• As per the above regulation 15 of the draft si provides that the income of the EUUT is taxable income in the hands of the investor. 
• There are rules to provide that income that is left is in the trust is still taxable income of the investor.  

Although it doesn't spell this out in the guidance I assume that in most cases there will be no liability to tax on the regulation 15 income as the investors in an EUUT are exempt but this would not be the case for a life insurer investing BLAGAB assets.  This will make EUUTs inefficient investments for BLAGAB assets of insurance companies as all of the income from the EUUT is taxable whereas some of the underlying income of the EUUT may have been non  - taxable dividends.

There are priority rules whereby if regulation 15 income is received by a trader it is taxed as trading income.  This would presumably apply to pension business investments of a life insurer.

Accordingly, the EUUT might be a good investment for pension business investments of a life insurer as it will provide genuine gross role up for these assets (you might have to think about foreign tax e.g. would it get USA 0% for pension schemes).  This will particularly valuable if HMRC adopts its proposals to abolish corporate streaming for AIFs.  It's interesting that in the UUT and loan relationship processes HMRC are trying to solve the same problem; how to prevent investors receiving distributions that are deemed to have had tax deducted from them when the UUT or AIF has not actually paid an equivalent amount of tax.  In the UUT legislation the pension business exemption has been carefully preserved but in the loan relationship consultation document its dismissed as of no importance.  (To be fair I think the AIF is a tougher nut to crack).  

NEUUTs have their own taxation regime.  In essence this taxes the NEUTTs as a company and income of a NEUUTs is a dividend in the hands of investors.  However, the exemption from chargeable gains only applies to EUUTs.  Accordingly there is the potential for capital gains in a NEUUT to be taxed twice once in the NEUUT and again when a taxable investor sells the holding. (Unless there's some way around this?).  Given the potential for double taxation its hard to think why any UK investor would want to invest in a NEUUT.

There are all sorts of rules for transition from the old UUT regime  to the new regime that look horrendous.  One that is worth noting is that if an existing UUT has both exempt and non  - exempt investors it will not be a EUUT or a NEUUT but a MUUT.  (I'm not making this up.)  For the moment at least MUUTs will continue with the existing (i.e. the old) UUT regime.

Rebates Legal Challenge

Just a quick update on the issue of the taxation of rebates paid by investment managers.  See Philip Govan's post of 5th April and my post of 18th June for the background.

Hargreaves Lansdown have announced that they are going to challenge HMRC's interpretation as set out in brief 04/13.  Link to the Hargreaves Lansdown announcement below.

Hargreaves_ Lansdown_ Announcement 

Rebates of management fees and mutual insurers

Prior to yesterday if you had asked me are rebates of AIF management fees paid to insurers taxable I would have said they definitely were and that this was probably because of FA 2012 section 92.  But now as far as mutual insurance companies are concerned I'm not convinced this is the case.

FA 2012 section 92 reads as follows

"92(1)  This section applies if–

(a)an insurance company has receipts that are taken into account in calculating its BLAGAB trade profit or loss (see section 136) for an accounting period,

(b)the receipts would not fall within the charge to corporation tax apart from this section, and

(c)the receipts are not excluded receipts.

92(2)  The appropriate amount of the receipts is an I – E receipt of the company for the accounting period."

I'm  happy that this brings rebates paid to proprietary companies in to the I-E tax charge but does it tax such amounts when paid to a mutual company?  I would think that it doesn't as the legislation states that the payments "are taken in to account in calculating its BLAGAB trade profit." Of course a mutual doesn't have such a calculation so it can't apply can it? (Or would a lawyer read in some sort of would have been wording ?)

If the amount isn't taxable under FA 2012 section 92 then might it be taxable under some other category of BLAGAB income.  Handily there is a definition of income in FA 2012 section 74.  I won't reproduce this as its quite long but there are three categories that I think need to be considered

"(h)income of the company chargeable under Chapter 7 of Part 10 of CTA 2009 (annual payments not otherwise charged),

(i)income of the company arising from a source outside the United Kingdom which is chargeable under Chapter 8 of Part 10 of CTA 2009 (income not otherwise charged), and

(j)income of the company chargeable under any provision to which section 1173 of CTA 2010 (miscellaneous charges) applies other than section 752 of CTA 2009 (non-trading gains on intangible fixed assets)."

I did wonder about section h but in the guidance to insurers on Revenue and Customs Brief 04/13 we have confirmation that rebates paid to insurance companies are not annual payments  in the guidance to insurers on Revenue and Customs Brief 04/13. (Post of 18th June gives the link for this.)

Section i may well catch rebates paid by a fund manager outside of the UK but is clear that it would not apply to payments from a UK fund manager.

Section j is a tiresome section as section 1173 CTA 2010 is a list of miscellaneous charges included elsewhere in CTA 2009 and CTA 2010.  I think its purpose is security against anything that's missed in sections a - i.  It does throw up one particular problem as one of the miscellaneous charges in 1173 is Chapter 8 of Part 10 of CTA 2009 which is already referred to in paragraph i.

However, CTA 2009 979 (which is the main section of chapter 8 of part 10 of CTA 2009) is unlike section of FA 2012 74 (1) (h) not limited to amounts that have a non  - UK source.

So does this have the effect of making rebates paid to mutual insurance companies taxable? You would need a lawyer to sort this one out but I'd guess that it doesn't.  That is there would be no point in section i if it didn't serve to restrict the CTA 979 charge to non - UK income.  But there's plenty of room for doubt here as you are then left with the question of what's the point of FA 2012 74 (1) (j)?

It would be interesting to hear if anyone else has views on this point. I think there is probably enough doubt around the conclusion to continue to advise mutual clients to include rebates of management charges as taxable in the I-E but perhaps refer to the possibility that other approaches could be adopted.

 

Search This Blog

Now that there over 50 posts on this blog I have added a search gadget to help access relevant content. The search feature is at the top of the blog page and as it's a google product it works in the usual way - i.e if you type in "double taxation" you get the 8 posts on this topic.

My original intention with the blog remains unchanged; that is I'll do a 100 posts or thereabouts to see what sort of reaction I get. At that point I'll take a view on whether its worthwhile continuing.  Any feedback I get from users will help me make a judgement.

Taxation of Funds

On Wednesday the 11th September I attended an ILAG tax forum on fund taxation.  The event was hosted by Deloitte with sections on corporate streaming, abolition of bond fund rules and tax transparent funds (TTFs).  Speakers were Eliza Dungworth, Nathan Powell and Gavin Bullock.  All very good of course although much of what was covered would be familiar to readers of this blog.  Some useful snippets.

• There seems to be a broad based opposition to HMRC's proposals on corporate streaming and bond funds.  It was mentioned that approaches had been made to HMRC prior to the consultation over whether the bond fund rules could be simplified (i.e. at present if a fund meets the qualifying investments test for one day of a companies accounting period then the company has to treat the fund as a loan relationship which is quite onerous for funds that are close to the 60% cut off)

• There was a reference to life insurers being interested in TTFs as a way of collectivizing existing property holdings (presumably in the way that JPUT's used to be used.)  I would have felt SDLT would have been a big stumbling block - is there a way around?

• Although not covered in the presentations I understand that HMRC have indicated that if they did abolish corporate streaming they would also do something to relax the 10% limit on holdings in a PAIF for life insurers.  My post of 4th September covers this point

This article is by richard bentley - see lifeassurancetax.blogspot.com
LifeAssuranceTax. blogspot.com





 

FII GLO

Just a quick note to a reference in CCH tax news to a decision in the European Court of Justice in Test Claimants in the FII Group Litigation v IR Commrs (Case C-362/12).

The decision was that  legislation introduced in the UK in 2004 which retroactively abolished the extended limitation period available for Kleinwort Benson claims was contrary to EU law.

I might do a longer post on this when (and if) I can work out what it means.

The link to CCH is here but I'm not sure if you'll be able to follow unless you subscribe.

CCH 

Transitional Relief

HMRC has now issued a statutory instrument revising schedule 17 of FA 2012 and in particular the rules concerning transitional relief and part vii transfers.  Some background on this is included in the post of 12 August 2013.

The statutory instrument can be found at 
http://www.legislation.gov.uk/uksi/2013/2244/contents/made

Suggestion on Corporate Streaming

At the risk of overdoing posts on corporate streaming there was one suggestion that I have for a revised approach that I think might work.

HMRC seems to have three aims from abolishing streaming.  Firstly it eliminates complexity, secondly it reforms rules that have at times been used in various tax avoidance schemes and finally abolishing streaming prevents the reclaim or repayment of tax where no tax has been paid in the AIF concerned.(see paragraphs 13.15 - 13.18 of the con doc).

Life insurance companies with pension business want to keep streaming as it allows them to use AIFs for pension business investment without the investors suffering an inappropriate tax charge.

I wonder if you could secure all four objectives by abolishing corporate streaming but retain the concept of the net liability to corporation tax and allow that net liability to be repaid when the dividend concerned is referable to the pension business of a life insurance company?

I'm not claiming it's as good a solution as retaining corporate streaming but it gives HMRC the win of abolishing streaming, explicitly links repayment to tax actually paid at the AIF level and retains the concept that arbitrary tax charges shouldn't be applied to pension business policyholders.

Also if the repayment of the net liability to corporate tax to life insurers was accepted it would then be possible to lobby for its extension to pension funds, charities etc.

PAIFs and Corporate Streaming

I was talking to someone who specializes in the taxation of collective investments who made a small but important point on life insurance companies investing in PAIFs that I had not previously appreciated.

In my post of 30th July I suggested that the proposed abolition of corporate streaming if implemented would make PAIFs an attractive vehicle for a life insurance company's pension assets.  However, what I hadn't appreciated was that if a life company does invest in a PAIF it will generally invest via a feeder unit trust.  I think this is something to do with a rule that prevents any company having a more than 10% holding in a PAIF which does not apply to feeder funds.

The  tax analysis of the feeder fund under current legislation is as follows.  The feeder fund will receive dividends from the PAIF that are taxable.  However, when the feeder fund in turn pays a dividend to the life company investor this will be streamed and will therefore be UFII with an amount of notional income tax that can be recovered / offset.  This ensures that pension business policyholders do not have to absorb the inappropriate tax charge that occurs in the feeder fund.  However, if the streaming rules are abolished then dividends from the feeder fund will cease to be UFII and the feeder fund tax charge will fall on pension business policyholders.

It seems that HMRC's proposals to abolish corporate streaming are being opposed by a number of industry groups.  If HMRC do decide to proceed with this pet project despite this opposition then at a minimum it will need to amend the 10% rule so that life company investors can invest directly in a PAIF without the insertion of a feeder fund.