Taxation of U.K. investment trusts

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Marc

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Quick update following preliminary assessment by our tax consultant on tax treatment of U.K. investment trusts held by Irish residents.

In a sample of 18 trusts 3 were determined to be funds taxable under gross roll up (41%) rather than general tax principles.

We have requested additional information from the managers but at first sight it could be the case that around 20% of U.K. trusts would fall into gross roll up.

As I have repeatedly pointed out it is mistake to assume that all trusts have the same tax treatment. The legislation states that in order for these investments to be considered funds for tax purposes, they must be "similar in all material respects to an Irish authorised investment company (within the meaning of Part 24 of the Companies Act 2014)

Section 1386 of the Companies Act 2014 contains the definition of “authorised investment company”.

This is not an absolute condition because subsection (2) provides that the Central Bank can approve investment companies that do not provide the facility to redeem their shares subject to such conditions as may be applied by the Central Bank. Section 1386(3) further provides that "action taken by an investment company to ensure that the stock exchange value of its shares does not deviate from its net asset value by more than a percentage specified in its articles (which deviation shall not be so specified as greater than 5%) shall be regarded as the equivalent of purchase of its shares by the investment company".

Another gem I picked up from a tax conference yesterday : if you hold a gross roll up fund purchased when non-resident your deemed 8 year tax applies from the date of purchase (even though you were non resident) not from date of residency.

Marc Westlake
Chartered Certified and European Financial Planner
www.globalwealth.ie
 
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Marc said:
As I have repeatedly pointed out it is mistake to assume that all trusts have the same tax treatment. The legislation states that in order for these investments to be considered funds for tax purposes, they must be "similar in all material respects to an Irish authorised investment company (within the meaning of Part 24 of the Companies Act 2014)

Section 1386 of the Companies Act 2014 contains the definition of “authorised investment company”.
Click to expand...
That’s only one leg of the test.
 
Hi Marc

Thanks for the useful info.

Reading some of the legislation, the 5pc deviation issue caught my eye. While I’m not an expert on investment trusts, none of those that I hold have any guarantee of percentage of NAV. Certainly when everything went crazy in March 2020, some of the discounts went to 20pc. Sometime ago a Lindsell Train investment trust had a premium of 50pc.

Was this the defining characteristic of the 3 out of 18 of investment trusts examined above or (in very broad terms) were there other factors at play?
 
It’s not necessary to be a guarantee. The legislation states “action taken”

Unhelpfully for Irish investors, in recent years the boards of more trusts are putting in place a Discount Control Mechanism (DCM) in an effort to control the discount on an investment company.

The more tightly worded the board’s statement of intent, the more likely the trust will fall into being a fund.

It doesn’t matter that at one time the trust traded at a wider margin to NAV than 5% what matters is the expectation of redemption in the future.
 
Unlike ETFs, the articles of association of UK-domiciled investment trusts do NOT contain any provision which requires any action to be taken by the company if its share price deviates by a specified percentage from the NAV of its underlying assets.

UK-domiciled investment trusts are not similar in all material respects to Irish authorised investment companies and are not subject to the exit tax regime.
 
The memorandum and articles of association contain the company rules. The memorandum of association is usually the shorter document and contains the more fundamental rules. If there is an inconsistency, the memorandum will prevail over the articles.

We have therefore requested the latest memorandum
 
A company’s memorandum of association sets out the main and ancillary objects of the company.

You won’t find a provision in the memorandum of association of any investment trust requiring any action to be taken when the share price deviates from NAV.

To be blunt, your tax analysis appears to be based on a fundamental misunderstanding.
 
Just to update this following receipt of a detailed analysis from a leading tax authority on the taxation of funds in Ireland.

“For some of these investments (U.K. investment trusts), the position is stronger as there are many reasons for concluding they are not funds, whereas for others there is perhaps just one fundamental distinction between these investments and fund investments. There is no guarantee that Revenue will agree with our analysis.

The analysis is based in particular on their memoranda and discount management policies.”

I have concluded that it would be dangerous for any investor to simply assume that all U.K. investment trusts are automatically subject to general tax principles.

I have found at least 3 where it is questionable that Revenue would not argue that they are funds subject to exit tax at 41%.

Caveat emptor
 
Marc said:
I have found at least 3 where it is questionable that Revenue would not argue that they are funds subject to exit tax at 41%.
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Well, any such argument would be doomed to fail.

UK-domiciled investment trusts are not similar in all material respects to Irish authorised investment companies and are not subject to the exit tax regime.

It really is that simple.
 
The most powerful words an actual expert can say are often "I don't know" or “there is still some doubt”

Which is why you should treat with utmost suspicion anyone, particular an anonymous poster on here, who claims to speak inviolable truths.

To sum up; I paid (as Theo would say on Dragon’s den) a sizeable portion of my children’s inheritance in fees for professional tax advice.

I shared the conclusions on here for free .
For the avoidance of doubt. There is some doubt
 
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@Marc

The extract from the advice that you have posted above correctly acknowledges that there is a “fundamental distinction” between UK-domiciled investment trusts and Irish-authorised investment funds.

If there is a “fundamental distinction” between these investments then they obviously cannot be “similar in all material respects”.

There really is no ambiguity here - UK-domiciled investment trusts are not subject to the exit tax regime.

This note from Cantor Fitzgerald Ireland summarises the main differences between investment trusts and funds and identifies the correct tax treatment for investment trusts -

Guide to Investment Trusts - Cantor Fitzgerald

In the search for diversification & risk reduction, collective funds have grown in popularity. Here we take a look at what investment trusts have to offer?
cantorfitzgerald.ie cantorfitzgerald.ie
 
You just couldn’t make it up

My emphasis in bold.



Tax Treatment
Capital gains from investment trusts are taxed in much the same way as direct equity rather than the more onerous fund tax*. Investment trusts can be subject to stamp duty depending on where they are listed. There is no minimum holding period or exit tax.

* Cantor Fitzgerald Ireland does not provide tax advice. You will need to speak with your tax or financial advisor.

quod erat demonstrandum
 
No, Cantor FitzGerald are not tax advisers.

But they have correctly identified the tax treatment of investment trusts in that note, having summarised the differences between investment trusts and funds.

Your own tax advisers have also apparently advised you that there is a fundamental distinction between between investment trusts and funds. It logically follows that investment trusts are not subject to the exit tax regime.

If your tax advisers had advised otherwise, I’m sure you would have posted that advice.

There is no basis to your scaremongering that some investment trusts might be subject to the exit tax regime. It is simply untrue.
 
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What really gets under my skin is posters who feel entitled to hold their own position, you might call it “scaremongering”

Post in thread 'Revenue E-Brief on ETFs'
https://www.askaboutmoney.com/threads/revenue-e-brief-on-etfs.224674/post-1739780

Yet simultaneously reject and dismiss out of hand challenges to their own prior assumptions when new evidence comes to light.

It does call into question their competence and perfectly explains the desire for anonymity
 
@Marc

I really don’t know what new evidence you are referencing.

We no longer know, with certainty, whether Revenue will accept that an SEC registered ETF that tracks a particular index is not similar in all material respects to an Irish-domiciled ETF that tracks the same index.

We used to know the answer to that question but the position is now uncertain because Revenue has withdrawn their guidance in this regard.

That is unarguable but it has nothing to do with the tax treatment of investment trusts.

I’m sorry if it annoys you when other posters challenge your pronouncements but that is the nature of an open forum.
 
Concerning UK investment trust, there are many statements that JAM JP Morgan American Investment trust is the way to go as an alternative to ETFs (I am talking about S&P500 ETF).

Do we have any solid conclusion at the end of 2023 that JAM is safe to invest for non-dom people and the remittance basis applies like for any other regular share?
 
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