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Build solid structures

The Investment Management Association’s market statistics are not exactly exciting reading for the investment industry at the moment, with total net sales in the negative by millions, but a bright light shines from the new absolute return sector.

The sums attracted to the BlackRock absolute alpha fund are there for all to see although the money has flown in at such a rapid pace that the mighty BlackRock may have to cap the size of the fund so it can continue to perform as it should in these volatile markets. But what will be flavour of the month when this market volatility calms? With over 30,000 products available to IFAs, product development personnel need to work hard to launch investment products that perform as well as they should.

We really need to avoid past errors such as split-capital investment trusts. As we now have a more rigorous compliance culture, I believe that under TCF and the financial promotions regime, investors will be more aware of the risks.

A starting point of investment product development is the structure of the investment and consideration of the taxation treatment. No point investing in the best-returning asset class when it is wrapped in a product structure causing 40 per cent of all the gain to be lost. There are a number of new investment initiatives that the Treasury is looking at to aid the investment industry, including its recently published discussion paper on the taxation of investment trust companies. The intention is to enable investment trust companies to invest in interest-bearing assets tax-efficiently.

In October 2007, the Association of Investment Companies published a report which noted that the UK tax rules acted as a barrier to ITCs being established in the UK. The report found that the main tax products problem was the absence of a tax-efficient method for UK-based ITCs to invest in bonds. The proposed new tax framework will enable ITCs to invest in interest producing assets tax-efficiently. The AIC report called for the ITC regime to be widened to allow for tax-efficient investment in property but the Government has decided against this. Consultation for this proposed change closes on October 22.

There is, however, a new property investment which has been available since April 6 – property authorised investment funds. But what is this new investment? In a simple explanation, property must make up 60 per cent of the Paif’s gross assets, including bricks and mortar, UK Reits, equivalent offshore entities to UK Reits and indirect holdings of offshore property via an intermediate vehicle. Most advisers will be able to recommend Paifs but the problem is that no investment company has as yet jumped upon this new product structure to launch a new fund.

Does this not lead one to think that before the Treasury spends many thousands of pounds devising new “tax efficient” financial product structures that they need to ascertain if there is the appetite in the investment houses to launch the products?

With the growing number of foreign companies that are seeking primary listings on the London Stock Exchange, we know that the UK, particularly London, continues to be an important global financial centre. We should have the tax treatment structure applicable to UK financial products which will encourage innovative product design that complements our standing as world leading financial centre.

Kim@techandtech.co.uk

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