Key Post How are UK quoted Investment Trusts taxed?

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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I'm a bit confused by this question, I have bought lots of Investment trusts, when I get dividends I have to declare them and pay tax on them the year after receiving them, I'm not sure why if you then sold at a loss revenue would be interested? Are you suggesting you can keep all the dividends on investment trusts tax free?

It's all very confusing now , I was of the opinion there was no ambiguity in the tax treatment, I feel like the more complicated Revenue make will just lead to people avoiding paying any tax at all.
 
Hi Fella

When I had an IT some years ago, I did exactly what you are doing. I never felt that there was any ambiguity.

I paid tax on the dividends.

Fella said:
I'm not sure why if you then sold at a loss revenue would be interested?
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Well I would have set the losses against gains on other shares. It seems that Revenue might have challenged that. They would have been wrong to challenge it, but the professional fees to argue with them would be a lot higher than any tax liability.

Brendan
 
Brendan,

I think we can see that post by Rory Gillen, to which you linked, was in the context of off-shore funds.

The "material interest" and "the 7-year rule" quoted in other posts above more than likely refers to TCA 1997 s 743 - Material Interest in Off-shore Funds.
 
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Brendan Burgess said:
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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Brendan, I see there's been a lot of discussion on this topic, and it's one I have become more familiar with. The Irish Revenue legislation does not actually deal with the traditional investment trust as a fund type. Tax experts in Ireland over the years have used some definitions in the Irish Revenue legislation to interpret the most likely appropriate taxation of them as being like securities (i.e. CGT and income tax applies with loss relief available). However, with the introduction of the REIT legislation in 2013 in Ireland for the first time (legislation dealing with the taxation of Real Estate Investment Trusts) the issue became clearer - REITs are subject to CGT and Income tax and loss relief is available. While this still doesn't see the Irish Revenue legislation deal with general (non-property) investments trusts, it is even more difficult now to argue against CGT, income tax and loss relief as being the appropriate treatment (as opposed to gross roll-up tax treatment).

The really baffling issue is the Department of Finance's tax treatment of ETFs (exchange-traded funds). There's now one rule for EU listed ETFs (gross roll-up: i.e. no loss relief and gains taxed at 41%) and another for non-EU listed (or regulated) ETFs (where CGT and income tax applies and loss relief is available). Now we have the bizarre situation where buying the same ETF (e.g. an S&P 500 Index ETF) on the European stock exchanges (like the Irish, London or Frankfurt stock exchanges) and the US stock exchange results in different tax treatments. Only in Ireland, surely!

Rory Gillen
 
Hi Sarenco

I was up to my eyes today so didn't get a chance to confirm those UK Investment Trusts that Revenue had taken issue with.

I should do tomorrow.

Regards

Gordon
 
Many thanks Gordon.

It would also be interesting to know if Revenue accepted that the UK incorporated ITs in question constituted non-equivalent "good" offshore funds (in which case the distinction is largely academic as normal tax principles apply). The equivalence test is obviously only applicable to offshore funds in "good" locations (which excludes Jersey/Guernsey).
 
One example where there was some fun is the JP Morgan American Investment Trust.

Their argument was that it is regulated by the FCA and the LSE in respect of listing and prospectus, and that the investment manager is also regulated. They also contended that it was similar to a Part XIII investment company. In addition they took issue with the fact that the prospectus states that any discount to NAV will be monitored and that share buybacks will be instigated if necessary. They also referenced AIFMD in the context of the "regulation test".

Ultimately, it was accepted that it should be taxed like a share (which I agree with), but it is not a slamdunk.
 
With regard to UK investment trusts, Revenue want to see no mention of regulation in the prospectus, and a discount to NAV of at least 8%. For the investor, either not being regulated like an Irish equivalent or a decent variation from NAV is sufficient.
 
Thanks for that Gordon.

It's good to see that Revenue ultimately accepted that the IT shares should be taxed in the normal manner and not as an offshore fund because those arguments really wouldn't survive any kind of legal scrutiny.

Take Foreign & Colonial - the oldest IT of them all.

I have an uncle that has held shares in F&C for nearly 40 years - having originally inherited the shares from his grandmother! In all that time he has paid income tax on the dividends in the normal manner. He would be absolutely stunned to learn that Revenue might seek to argue that he is actually invested in an offshore fund.

A few years ago the Board of F&C reduced the target discount to NAV at which the Company buys back shares from a level of 10% to an average level of 7.5% (the last time I checked the discount to NAV was at around 9%). But the share premium/discount to NAV is not static - it changes all the time. So at what point in time does Revenue think an investor is supposed to determine that the shares are no longer to be taxed in the normal manner but all of a sudden should be taxed as an (equivalent) offshore fund (in a "good" location)?

Can the tax status of the investment change back again if the discount widens? What if the discount blows out beyond (the entirely arbitrary) 8% level before the 8-year deemed disposal? And what happens if an IT has no buy back policy but the shares happen to trade within 8% of NAV (over some equally arbitrary time period)? What about an IT that invests in private equity (where the NAV is only a rough guess - at best)? Or an income IT (like City of London) which often trades at a premium (rather than a discount) to NAV?

Because of the way AIFMD is drafted all ITs are technically AIFs - which means, amongst other things, that they have to have a regulated AIFM. But that doesn't mean that the IT itself is a fund, much less a regulated fund (in the same way as a UCITS is a regulated fund). The three Irish REITs are also captured by AIFMD and Revenue doesn't argue that they should be taxed as funds.

The key distinction between a Part XIII (now a Part 24) company and any other type of public limited company is the ability to issue variable capital with no par value. In the UK, that would be the equivalent of an OEIC (open-ended investment company), which is structurally totally different to a (fixed-capital) IT.
 
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Sarenco

The argument taken to its most ludicrous level could result in Finsbury taxed as a share for you and as a fund for me, based purely on when we invested.

My simple view, forgetting the regulation test, is what expectation can an investor in a closed ended investment trust have about getting their share of NAV?

None. They're shares.
 
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Why do they not want to be absolutely clear on investment trusts like they have been with REITS. Are they afraid that if they clarify the situation then investment trusts become a mainstream investment for Irish people , and newspapers will start recommending them for the taxation benefits therefore resulting in big outflows from Irish investment vehicles.
 
joe sod said:
Why do they not want to be absolutely clear on investment trusts like they have been with REITS. Are they afraid that if they clarify the situation then investment trusts become a mainstream investment for Irish people , and newspapers will start recommending them for the taxation benefits therefore resulting in big outflows from Irish investment vehicles.
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If that was a concern, they wouldn't be putting Irish ETFs at a disadvantage versus US ones.

Incompetence and an inherent bias against investors in my view.
 
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