Key Post How are UK quoted Investment Trusts taxed?

Brendan Burgess

Brendan Burgess

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Sarenco said in this post:

"I'm not a fan of investing in individual stocks. Personally, i think that investment trusts give the best balance between achieving an appropriate degree of diversification and (relative) tax simplicity. Something like Foreign & Colonial Investment Trust plc is a good core holding - well diversified on a sectoral/global basis, relatively cheap, hands off investment vehicle that is taxed in the same way as individual stocks (income tax on dividends, CGT on capital gains)."

and in this one:

UK investment trusts are certainly an alternative if you are looking for a diversified equity investment that is subject to the income tax/CGT regime with no US withholding or estate tax complications. However, all mainstream UK ITs are actively managed, distributing vehicles - they are not accumulating index funds.

I think ITs are a particularly good option for an investor with a low marginal tax rate that is looking for a relatively reliable income stream, with the potential for long-term income and capital growth.
 
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Hi Brendan

Investment trusts are UK incorporated plc's, like any other, listed and admitted to trading on the London Stock Exchange. They are fixed capital companies so their shares trade at a premium or discount to their (notional) NAV.

They are actively managed and can employ leverage. You are quite correct that, like any actively managed vehicle, they can incur trading costs over and above the trading costs of a passively managed fund.

Costs vary but the trust quoted above has an ongoing charge of 0.8%.

Investment trusts have been around for a very long time and have always been taxed like any other listed shares.
 
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Sarenco said:
Investment trusts have been around for a very long time and have always been taxed like any other listed shares.
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That was always my assumption and many years ago I had a UK investment trust.


But some doubt had been raised about this when the taxation of ETFs was being discussed e.g. Rory Gillen said in this post:

"UK listed investment trusts that are constituted under UK law and subject to a regulatory regime most likely fall under Part 13, Irish Companies Act, and subject to gross roll-up rules for Irish residents. But non-UK registered investment companies (Guernsey registered for example, of which there are many) probably should be categorised as bad offshore funds and taxed as normal securities (income tax on dividend and CGT on gains) with loss relief."

Brendan
 
Yes, I've seen that post previously. Frankly, it doesn't make any sense - how could a company incorporated in the UK fall under the Irish Companies Acts?

There is no doubt that shares in a UK investment trust are subject to income tax/CGT. However, I would emphasise that I am only referring to investment trusts that are incorporated in the UK as plc's - not listed channel island entities.
 
Is there such a thing as a passively managed Investment Trust with very low charges? One that mimics a low cost ETF?

I don't consider the 0.8% charge for Foreign & Colonial to be low. If the return is 5% a year, that would be 16% of the return.


Brendan
 
Brendan Burgess said:
Is there such a thing as a passively managed Investment Trust with very low charges? One that mimics a low cost ETF?
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Yes, they do exist (although they are pretty unusual). From memory, Aberdeen has an investment trust that tracks the FTSE All Share index.
 
Here's a link to a factsheet for the Aberdeen UK Tracker Trust Plc.

TER of 0.29% and currently trades at a significant discount to NAV.



Having done a bit more digging, I'm pretty sure this is actually the only index tracking investment trust.
 
Sarenco, I agree that UK investment trusts are subject to standard tax treatment. However, it is not as clearcut as people think, and Revenue dispute the issue in respect of certain ITs. When determining whether a UK based investment is subject to the 41%/25% gross roll up regime, there are two tests:

- Is it regulated in a manner that is equivalent to that of a regulated Irish fund?

- Can the investor expect to realise his/her proportionate share of the IT's NAV within seven years?

The answer in both cases is generally "no" in my view, but some ITs have discount control mechanisms in place which limit the disconnect between share price and unit price. And as I understand it, Revenue have a rather interesting view that 92% or 95% is the same as 100%. I must remember that when I'm settling my 2015 tax bill. I also understand that they dispute the regulation point (incorrectly).

A "no" in respect of either question is enough to get the investment out of the gross roll up box for an investment in a "good" jurisdiction, while for an investment in a "bad" jurisdiction (e.g. Guernsey), only the second NAV test applies.

The above summary is meant to be just that - A simplified summary rather than a technical note. My main concern is that investors don't listen to Revenue's advice about the tax treatment of investments (or anything else for that matter). There is a high probability of receiving nonsensical advice from someone who hasn't a clue, or more sinister advice from someone with an inherent bias against people who are perceived as wealthy.
 
So if I invest in the Aberdeen UK Tracker Trust plc collect the dividends and later sell it at a loss, am I liable to be challenged by the Revenue?

Brendan
 
Sorry, but whichever Revenue official dreamed all that up is simply wrong.

UK incorporated investment trusts are not regulated and no shareholder ever has a beneficial interest in the underlying assets of the company, proportionate or otherwise. It's extremely common for ITs to have discount control mechanisms in place - if these are effective, that doesn't magically turn an IT into a fund. An IT's NAV is an entirely notional figure - a shareholder can never realise a share of the NAV in the way that an investor in a fund can.

Obviously, completely different criteria apply to funds that are authorised in the Channel Islands (or anywhere else for that matter) and are admitted to trading on the LSE.
 
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Brendan Burgess said:
So if I invest in the Aberdeen UK Tracker Trust plc collect the dividends and later sell it at a loss, am I liable to be challenged by the Revenue?
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I would be absolutely stunned if Revenue tried to argue that was a fund when it very clearly isn't a fund.
 
Brendan Burgess said:
So if I invest in the Aberdeen UK Tracker Trust plc collect the dividends and later sell it at a loss, am I liable to be challenged by the Revenue?

Brendan
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Unlikely, unless you are audited. Revenue do not agree with the contention that all UK investment trusts are treated like shares. However, they are wrong. Sarenco and I agree about the tax treatment, just not that it is a slamdunk.

Sarenco said:
It's extremely common for ITs to have discount control mechanisms in place - if these are effective, that doesn't magically turn an IT into a fund. An IT's NAV is an entirely notional figure - a shareholder can never realise a share of the NAV in the way that an investor in a fund can.

Obviously, completely different criteria apply to funds that are authorised in the Channel Islands (or anywhere else for that matter) and are admitted to trading on the LSE.
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They're not really different criteria (that apply to Guernsey based Investment Trusts). The regulation test simply doesn't apply, so one looks at the second test only (i.e. relationship between the share price and the NAV). If the two correspond, Revenue will view it as a fund. I'm not saying they're right, but you're making it sound more clearcut than it is.
 
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I have never come across a listed channel islands investment vehicle that wasn't authorised under the applicable investment fund legislation.

Can you point me to a specific UK incorporated investment trust that Revenue has suggested might be treated as a fund?

The share price of an investment trust is always correlated (however imperfectly) to its (notional) NAV - by that criteria all investment trusts would be funds.
 
Sarenco said:
I have never come across a listed channel islands investment vehicle that wasn't authorised under the applicable investment fund legislation.

Can you point me to a specific UK incorporated investment trust that Revenue has suggested might be treated as a fund?

The share price of an investment trust is always correlated (however imperfectly) to its (notional) NAV - by that criteria all investment trusts would be funds.
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The regulatory status of a channel islands investment is completely irrelevant. The only test in the legislation is the "material interest test", centering around the investor's expectation of realising his or her proportionate share of the NAV within seven years.

If such an investment trust does not drop to more than 5% discount, Revenue's view is that it is a "fund".

I'm not suggesting for one minute that they're correct. I meant "correspond" rather than "correlate" by the way.
 
UK incorporated investment trusts are not, and have never been, treated as funds for taxation or any other purposes in Ireland.

UK investment trusts have existed for well over a century and have always been subject to income tax and CGT (since the introduction of that tax). There really is no ambiguity on the point.

ITs are structurally totally different to variable capital investment funds. ITs are not authorised by any regulatory authority and are not treated as investment funds in the jurisdiction where they are incorporated for regulatory, tax or any other purposes.

The "material interest test" relates to offshore investment funds. It has absolutely nothing to do with whether or not an investment trust is a fund.
 
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Gordon Gekko said:
Revenue dispute the issue in respect of certain ITs. When determining whether a UK based investment is subject to the 41%/25% gross roll up regime, there are two tests:

- Is it regulated in a manner that is equivalent to that of a regulated Irish fund?

- Can the investor expect to realise his/her proportionate share of the IT's NAV within seven years?
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Hi Gordon

This ties in with what Rory Gillen said. It really surprised me at the time. Was this a conversation with a Revenue official or is it in writing somewhere?
 
Brendan Burgess said:
Hi Gordon

This ties in with what Rory Gillen said. It really surprised me at the time. Was this a conversation with a Revenue official or is it in writing somewhere?
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Hi Brendan

The commentary is extremely limited, so not in writing. My direct experience with Revenue is that they dispute the regulation question, and hone in on the material interest test. With an IT where the share price and NAV are VERY similar (perhaps due to discount control), Revenue have sought to argue that the investment is a "fund" for tax purposes. That is my experience, and also the advice I have seen from Big 4 and specialists in this area.

As I have said on numerous occasions, I'm not saying they're right, just that they have a view which differs from the correct one.

My issue is with the contention that this is a simple and straightforward area. It is not.
 
Gordon

Can I ask whether your direct experience with Revenue related to an investment trust incorporated in the UK or a listed entity incorporated in Jersey or another Channel Island?

For the avoidance of any doubt, my position that the Irish tax treatment of shareholdings in investment trusts is straightforward only relates to UK incorporated, fixed capital, investment trusts.
 
Thanks guys.

You both agree that quoted investment trusts should be treated like ordinary shares according to the legislation.

But Revenue has attempted to treat them like unit funds.

The problem for the ordinary investor here is that they may face having to pay big professional fees to argue their case.

In a worst case scenario, the punter could face penalties and interest for treating these incorrectly in the Revenue's view, although correctly according to law.

It seems a very unsatisfactory situation. Is there not a process for Revenue to issue formal clarification?
 
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