Collective investments schemes in the UK currently enjoy a favourable tax position allowing them to invest in a capital gains tax free envir...

Collective investments schemes in the UK currently enjoy a favourable tax position allowing them to invest in a capital gains tax free environment. Accordingly, “private” versions are increasingly being used by investors as long term investment vehicles to enhance investment returns.

During the summer of 2004 the UK Inland Revenue issued a discussion paper seeking views on the taxation of the group of investment vehicles known as “Authorised Investment Funds” (AIFs), which include “private” unit trusts and open-ended investment companies (OEICs).

The outcome from this paper was an unexpected statement in the Pre- Budget Report, which implied that the current tax benefits enjoyed by investors in such schemes were too generous and they should in future only apply to funds with no member or connected group held more than 10 per cent of the fund. Unfortunately, no details were given as to how any new arrangements would apply, and many in the private client community are worried that the Inland Revenue is now seeking to disqualify “private” family collective investment schemes from the favourable tax regime. If this implication is correct and was carried to the statute book, then the scope for using unit trusts and OEICs as a tax efficient investment vehicle would be severely curtailed.

The good news is that, since December, the UK Treasury have clarified their position following representations from interested parties and have recently stated that they currently have no intention of changing the tax treatment of AIFs. Therefore, unit trusts where one investor holds in excess of 10 per cent of the fund by value will still be exempt from capital gains tax on any realised investment gains. This applies both to existing and future AIFs.

However, all uncertainty has not disappeared as the Treasury is still considering the investor’s tax position with regard to these funds. If the Government choose to remove the tax certainty of AIFs at the investor’s level, or for example cap the amount that can be invested, then it could remove the attraction of these vehicles and lead to many sophisticated investors having little choice but to move offshore. Let us hope that is a bridge that does not need to be crossed.