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Last week, I closed with the reassuring confirmation that it seems pretty clear that the Government recognises the need to treat capital gains made by unit trust groups and life insurers differently from ordinary companies.

The rationale for this appears to be that a substantial proportion of the gains of unit trust groups and life insurers are made for individual investors and not for the company. Of course, companies can invest in collectives and life insurance, thus gaining the advantage – if it becomes one – of not having capital gains taxed on whatever basis may emerge from the consultation.

By wrapping investments in a collective or insurance structure, an investor ensures that the gains made by the investing institution are attributed to the investor, regardless of whether they are an individual, trustee or company. Of course, the investor is taxed when gains are realised by disposing or part-disposing of the collective or insurance policy and whether the net outcome is better or not will depend on the facts. What is clear, though, is that both now and, it seems, in the future, deferment of investor tax on capital gains can be secured by investing via a collective or insurance wrapper. There are, of course, exceptions such as personal portfolio bonds but, on the whole, this tax deferment is available.

But there would seem to be nothing in the document that would appear to extend favourable treatment to the holding of the collective itself by a company which, as stated in an earlier article, could be taxed on a mark-to-market basis. This would mean that although there would be no tax on the capital gains made by the collective fund manager in respect of the investments held, the investing company could have an attributed gain each year in respect of the collective.

As non-qualifying life insurance policies are not subject to tax on capital gains, then the proposals for mark-to-market on capital gains would not apply to life policies.

If any new regime incorporating no indexation relief and taxation on a mark-to-market basis is introduced, at least there is recognition in the document of the need for a transitional period, with only assets acquired after the commencement date being subject to the new regime. However, any assets that were already dealt with on a mark-to-market basis in the accounts of a company would be taxed on the new basis from the commencement date despite being held before that date. Assets not dealt with that way in the accounts would continue outside the new regime until first disposed of.

Another important proposal is that, to align corporate taxation with accounting principles, tax relief may be given for depreciation recognised in the accounts and the system of capital allowances may be abolished. Currently, while depreciation is deducted in arriving at profits for the accounts, all accounting depreciation is added back to taxable profits and a deduction made for capital allowances if appropriate.

Advisers must keep an eye on developments to be aware of what expenditure does and does not qualify for tax relief as, in some cases, expenditure that generates capital allowances is substantially tax-driven and acts as a competitor to other expenditure on investment and financial planning.

In considering any corporate investment that is not directly for the purpose of the company&#39s trade, there is the risk that there would be an adverse effect on the availability of business assets taper relief for shareholders in a trading company. Broadly speaking, if the investment is substantial, representing more than 20 per cent of company assets, or generates more than 20 per cent of the company&#39s income or gains or takes up more than 20 per cent of the company&#39s time, there could be a denial of business assets taper relief for a period on a disposal of shares in the company by the shareholder on the grounds that the company does not exist wholly or substantially for the purpose of trading.

Investments made to fund a specific future business development should not be detrimental in this context. It is also important to remember that substantial cash holdings for no business purpose can be dangerous for the purposes of business assets taper relief.

Chapter five considers the attraction of a review of the differences between the taxation of investment and trading companies. Abandonment of the difference in their tax treatment does not seem favoured but a review seems likely. One suggestion is to distinguish between active and passive investment companies, with the former being treated like trading companies.

Changes may have some positive impact on the ability of investment companies to fund for approved pensions.

In conclusion, issues of interest for financial advisers are:

•The possible taxation of corporate capital gains/losses on a mark-to-market (year by year) basis.

•The possible abolition of indexation relief for companies.

•The retention of capital gains tax freedom for gains made by collective managers and indexation relief for life funds.

•The possible removal of some differences between investment and trading companies.

•The basing of tax relief for capital expenditure on the accounting basis, with the removal of the separate regime of capital allowances.


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