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Paul Kennedy: Scrapping Schedule 19 stamp duty could improve fund performance

In its recent Budget, the Government announced its intention to abolish the Schedule 19 stamp duty reserve tax charge on UK authorised investment funds.

This change will be legislated for in Finance Bill 2014 to take effect in tax year 2014/15. Schedule 19 is complex and costly for platforms and asset managers to administer and the UK investment funds industry has lobbied for many years for its abolition. It is frequently cited as one of the factors that put UK funds at a competitive disadvantage.

This may all look a tad dull but is of relevance to investors in many UK investment funds. Like individuals, UK authorised funds must pay SDRT at 0.5 per cent on purchases of UK equities. Sometimes known as the ‘principal charge’ or the ‘Section 87 charge’ its operation is easy to understand.

However, for UK domiciled funds there is a further layer of SDRT, the Schedule 19 charge. This second layer of charge is not concerned with the purchase of UK shares by the fund but operates as a charge as units pass from one investor to another.

The Schedule 19 charge is complex but in essence, the fund pays 0.5 per cent SDRT on the value of units the fund manager buys back from one investor and sells on to another. The amount of duty is then reduced by the proportion of the fund not invested in UK equities.

Put simply, the fund is hit with SDRT on each unit’s UK equity content, each time it is ‘transferred’ between investors.

Sometimes, there can be a third layer of charge where a UK authorised fund invests in another collective investment scheme. Previously, this could be quite penal because the charge was levied even if the other fund was invested mainly in assets that themselves were not subject to stamp duty. This was relaxed in Finance Act 2011.

Overall, stamp duty on UK authorised investments funds is something of an alchemist’s brew going on in the tax departments of fund houses. However, as the investor ultimately foots the bill we do need to know a little on how this proposed change could affect them.

Stamp duty costs are not ordinarily included within the annual management charge or as part of the additional expenses. They are not part of the TER.

The charge is normally made direct to the capital account of the fund, as permitted by FSA Regulations.

The cost of the Schedule 19 charge to individual funds will vary but UK equity funds can typically pay away several basis points a year. The charge has the effect of reducing overall fund performance and therefore the investor’s return. The odd fund makes a levy up front on new investments to mitigate the effect of the tax to be paid by existing investors.

Whilst the principal, Section 87 charge remains, assuming Schedule 19 is abolished investors should get a performance boost when the fund is no longer required to pay this element of SDRT from its capital.

The charge to SDRT has not been abolished in its entirety for UK funds but the overall SDRT bill should reduce.

It will be interesting to see how any fund groups currently levying SDRT upfront react in the interim, in the knowledge that the overall SDRT bill should, in theory, soon reduce.Paul Kennedy is head of tax planning at FundsNetwork

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