STAMP DUTY: UNIT TRUSTS AND OPEN-ENDED INVESTMENT COMPANIES

A new stamp duty reserve tax (SDRT) regime will be introduced for
dealings in units in unit trust schemes. The new regime will be more
straightforward to administer and pave the way for the electronic
trading of units, while maintaining a broadly consistent approach
between dealings in units and dealings in shares.

These changes will apply to transfers of units in unit trust schemes
on or after 1 October 1999. The Government will bring in Regulations
to introduce an equivalent regime for dealings of shares in
open-ended investment companies (oeics) from the same date.

DETAILS

1. Purchases and sales of units in unit trusts are generally made
directly with unit trust managers. As well as reselling units to new
investors, the manager is able to cancel units and create new ones to
match demand. This reflects the fact that unit trusts are open-ended
and is quite different from the position with company shares. So
special Stamp Duty rules are needed for trading of units.

2. The Government's objective is that Stamp Duty should be applied to
dealings in units on a broadly consistent basis compared with
dealings in shares. This avoids any Stamp Duty incentive to trade in
units rather than directly in shares and securities.

Existing stamp duty regime

3. The existing stamp duty regime, which dates from 1946, charges
Stamp Duty at 0.5 per cent on all surrenders of units to the trust
managers. If the manager resells the unit to a new investor there is
no further 0.5 per cent charge. This means that there is a single 0.5
per cent Stamp Duty charge on a transfer between two investors, as
there is when shares in a company are transferred between two
investors - either directly or via a market maker.

4. But where the surrendered units cannot be sold to other investors
within two months, the trust managers may claim a refund of the 0.5
per cent duty provided that as a consequence they dispose of a
corresponding amount of the trust's underlying assets and cancel the
units. This avoids a double charge to Stamp Duty as the sale of
underlying assets normally attracts a Stamp Duty charge in its own
right.

5. The current regime is complex to operate as every individual
surrender is physically stamped and every individual reclaim needs to
be associated with a consequential disposal of fund assets. And the
regime has been called into question by a recent decision of the High
Court.

New stamp duty reserve tax regime

6. In view of these problems, the Government has decided to introduce
a clear and straightforward stamp duty reserve tax (SDRT) framework
for trading in units in unit trusts. As SDRT does not require the
physical stamping of documents this change will also facilitate moves
enabling units to be traded electronically.

7. As now, there will be a general 0.5 per cent change on all
surrenders of units to the trust managers. Where the trust is growing
and there are at least as many sales to new investors (including the
resale of existing units and the issue of new ones) as there are
surrenders, this 0.5 per cent charge will be the final liability.
This matches the current system where there is no need for the trust
managers to make net disposals of assets.

8. Where the trust is shrinking and there are only surrenders of
units and no sales to new investors, then there will be no SDRT
charge on the surrenders. This will directly prevent the potential
double charge as assets are sold.

9. Where the trust is shrinking, but there are both surrenders of
units and sales to new investors, the SDRT charge will be reduced to
the extent that the number of surrenders exceeds the number of sales
to new investors. That is because it is the extent to which
surrenders are greater than sales to new investors which normally
leads the trust manager to dispose of underlying trust assets of the
trust. Other surrenders - those that are matched by sales to new
investors - are in effect transfers between two investors and will be
liable to the SDRT charge.

Charging and accounting periods

10. The new regime will apply to surrenders after 1 October 1999.
SDRT will be charged at 0.5 per cent of the total value of units
surrendered to the trust managers in return for cash during each
calendar month charging period, subject to the possible reduction
referred to in paragraph 9.

11. Where the number of sales of units to new investors during the
charging month and the following month is equal to or greater than
the number of surrenders during that two month period, the SDRT
charge will be the full 0.5 per cent of the value of all surrenders
for the charging month.

12. But where the number of sales of units to new investors during
the two month period is less than the number of surrenders during
that period, the charge will be the reduced amount obtained by
applying the following fraction to 0.5 per cent of the value of all
surrenders in the charging month:

Number of units sold to new investors in the two months
-------------------------------------------------------
Number of units surrendered in the two months

13. It is necessary to compare sales and surrenders over a longer
period than a month because the resale of a unit must follow its
surrender. The two month period achieves broadly the same effect as
the two month period for reclaims in the current system.

14. The new regime is more straightforward and easier to administer
since unit trust managers will be required to submit a single return
for each month. Payment of the SDRT will be required fourteen days
after the end of the two month period used in the formula (by which
time the number of units sold and surrendered in that period will be
known).

In specie redemptions

15. Sometimes unit holders are able to take some of the trust's
underlying assets in return for redeeming their units rather than
taking cash. These are known as in specie redemptions, and generally
occur with large institutional investors in unauthorised unit trusts.
Such transactions will be excluded from the count of surrenders for
the purposes of the SDRT charge set out above.

16. For certain in specie redemptions there will be an SDRT charge on
the manager. Where the investor takes a basket of shares in the same
proportions as the investments of the unit trust as a whole (a
pro-rata redemption) there will not be any SDRT charge. This is
because there is no material change in the nature of the assets owned
by the investor. But where the in specie redemption is not pro-rata
there will be a 0.5 per cent charge on the whole amount.

17. Since, in appropriate cases, the SDRT charge applies to the
manager, a parallel provision will ensure that there is no charge on
an investor in respect of the transfer of assets under an in specie
redemption (whether or not pro rata).

NOTES FOR EDITORS

High Court Decision

1. On 21 January 1999 in the Chancery Division of the High Court, Mr
Justice Park gave judgement in the cases of M & G Securities Limited
v the Commissioners of Inland Revenue and Schroder Unit Trusts
Limited v Commissioners of Inland Revenue. The Plaintiffs claimed
that they were entitled under the 1946 law to repayments of Stamp
Duty paid in respect of a number of in specie redemptions. The
defendants (the Revenue) denied that the plaintiffs had met the
conditions required for them to be entitled to repayments. Mr Justice
Park decided in favour of the plaintiffs. The Inland Revenue has
served notice of an appeal against this judgement.

Open-ended investment companies

2. An open-ended investment company (oeic) is a collective investment
vehicle, similar to a unit trust, but set up as a company with
variable capital. A Stamp Duty and SDRT regime which broadly mirrors
the existing Stamp Duty regime for units in unit trust was introduced
for transfers of shares in oeics, by the Stamp Duty and Stamp Duty
Reserve Tax (Open-ended Investment Companies) Regulations 1997 (SI
1997/1156).

3. The Government will be amending these Regulations to introduce a
regime for oeics which mirrors the new SDRT regime for unit trusts
with effect from the same date.

Revenue effect

4. The revenue effect of the change is negligible since the new
regime will achieve broadly similar results in terms of tax
liabilities.

INLAND REVENUE PRESS OFFICE
Media enquiries to: 0171 438 6692/6706/7327
(Out of hours: 0860 359544)
Non-media enquiries to: 0171 438 6420/6425

Inland Revenue information is on the Internet:
www.inlandrevenue.gov.uk

# = pounds sterling