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6. Savings and investments

6.1 OVERVIEW

When managing ones investments (incorporating appropriate asset allocation) to produce acceptable returns whilst managing risk takes absolute priority in portfolio planning, maximising the tax efficiency to minimise tax on investments can substantially add to the bottom line. This year the Chancellor tinkered with some of the rules of existing tax efficient investments.

We cover pensions and life assurance policies elsewhere in this bulletin but in this section we will look at

· ISAs
· Child Trust Fund
· Collective investments
· Film partnerships
· Real Estate Investment Trusts


6.2 ISAs

The Chancellor has announced that the £7,000 maximum investment limit and £3,000 for cash is to be retained until 5 April 2010. The limits were due to fall to £5,000 and £1,000 respectively from 6 April 2006 subject to Inland Revenue consultation to retain the limits until 5 April 2009.

He has also announced that from 6 April the scope of qualifying investments for ISAs will be widened. All retail collective investment schemes authorised by the Financial Services Authority (FSA), both UCITS and non-UCITS retail schemes, will qualify provided they do not restrict savers’ ability to access their savings. Schemes which apply the “limited redemption” rule, introduced by the FSA, will not qualify.

Further, the qualification will be extended to any similar overseas non-UCITS retail scheme, provided it is regulated by the FSA.

The “cash-like” test will continue to apply to ISAs so that those schemes promising cash-like returns on investment will be limited to the cash component of the ISA.

6.3 CHILD TRUST FUND

The scope of qualifying investments for the Child Trust Fund has been widened as for ISAs. This means that all retail collective investment schemes authorised by the Financial Services Authority (FSA), both UCITS and non-UCITS retail schemes, will qualify provided they do not restrict savers’ ability to access their savings. Schemes which apply the “limited redemption” rule, introduced by the FSA, will not qualify. Further, the qualification will be extended to any similar overseas non-UCITS retail scheme, provided it is regulated by the FSA.

The Chancellor announced that the Government will now consult on what further payments should be made at secondary school age.

6.4 COLLECTIVE INVESTMENTS

Several minor technical changes will be made to the taxation regime that governs collective investment schemes in respect of certain chargeable capital gains arising to other than individuals. There are also powers to reform the taxation treatment of authorised unit trusts and OEICs. The most notable of these reforms is the proposal to allow a mixed fund to distribute both dividends and interest in the same accounting period. Collectives can invest in a mix of assets, including equities and bonds, but the ‘bond fund’ rules prevent them from making distributions fully reflecting that mix. The daily “bond fund” test is to be removed and funds will be able to make interest and dividend distributions in the same period in proportion to the interest and other income received. Funds will be able to elect to distribute profits only as dividends.

Further, the rules determining who can receive interest distributions gross will be aligned with the gross payment rules for bank interest.


6.5 FILM PARTNERSHIPS

The 100% tax relief available under section 48 Finance Act (No 2) 1997 to individuals who invest in British films via film partnerships was due to be withdrawn from 1 July 2005. The Chancellor has announced that the relief will be extended to 31 March 2006.

The basis for the film tax reliefs is that expenditure on the production or acquisition of the master version of a film is treated as revenue expenditure and there are detailed rules as to when that expenditure is to be written off.

When people use the term “film partnership” they are usually referring to relief given under section 48. Section 48 is the more generous of the reliefs as it allows the loss that arises on the production or acquisition of a film to be relieved in one year (rather than spread over several years). However, there are some conditions that have to be met, which are as follows:-

The film must be a “British” film as certified by the Department of Culture, Media and Sport

The production expenditure and completion of the film must occur between 2 July 1997 and 31 March 2006

Total production expenditure must be £15 million or less.

Traditionally the partnership has a life of 15 years as this is the period the Inland Revenue will treat as acceptable for full returns on the film to be made. This 15 year period is now the period for which a guaranteed income arrangement must run to secure maximum tax relief.

6.6 REAL ESTATE INVESTMENT TRUSTS

Last year the Government published a consultation paper alongside Budget 2004 to
consider reform to the taxation of the property investment market in the UK.

The consultation considered the introduction of Property Investment Funds in the UK equivalent to Real Estate Investment Trusts (REITs), which are common to many economies around the world with developed property markets. Such reform would be of particular benefit to the commercial property market, helping to promote greater liquidity, more efficient investment decisions and wider access to smaller investors. It would also aim to address the unresponsive supply of housing through greater institutional investor participation in the residential market.

As part of the consultation, the Government set out four key objectives for
reform, as summarised below:

Improving the quality and quantity of finance for investment in commercial and residential property;

Expanding access to a wider range of savings products on a stable and well regulated basis;

Protecting all taxpayers by ensuring a fair level of tax is paid by the property sector; and

Supporting structural change in property markets to reduce costs and improve flexibility and quality for tenants.

The consultation closed in July 2004 which broadly endorsed the initial proposals. The consultation process has enabled the Government to better define the key features of a UK-REIT model, which allows for market flexibility within a framework of a closed-ended company structure. It has also highlighted three challenging issues around the tax treatment of this model, relating to non-UK resident investors, borrowing and group structures, which the Government will be looking to discuss further with industry.

A further consultation paper has now been issued which:

recaps the policy rationale for introducing a REIT in the UK;

highlights the key structural features that might apply to a REIT in the UK in the context of developing a model broadly along the lines envisaged in consultation responses;

outlines how the tax rules could be adapted to fit this model and then highlights some important and challenging issues, relating to non-UK resident investors, borrowing and group structures. These all pose a significant challenge to meeting the objective of closer alignment between the taxation of direct and indirect property investment. It is these issues that the Government will be looking to discuss with industry; and

invites the industry to work with Government and sets out the next steps, including establishing a working group to take forward discussion with industry representatives.

Following the consultation the Government hopes to introduce legislation in the Finance Bill 2006.

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