105/02
16 October 2002
BOOST FOR OEICs AND AUTHORISED UNIT TRUSTS
The competitiveness of UK fund managers selling open-ended investment companies (OEICs) and Authorised Investment Trusts was enhanced today by three changes announced by Ruth Kelly, Financial Secretary to the Treasury.
The changes are:
- relaxing the requirement for overseas investors who wish to receive gross interest from authorised funds, such as OEICs, to make a declaration that they are not ordinarily resident (NOR) in the UK;
- exempting the holdings of overseas investors in such funds from inheritance tax;
- extending the exemptions from stamp duty and stamp duty reserve tax (SDRT) for authorised unit trusts that merge with an OEIC indefinitely beyond the end of November.
Announcing the decisions Ruth Kelly said:
?Today's measures will make UK OEICs more attractive to foreign investors. The rules governing overseas investors no longer work well. Removing the need for a NOR declaration and the potential inheritance tax charge will allow UK fund managers to compete on an equal footing with overseas rivals.
?The Government recognises that the stamp duty exemptions continue to be helpful in allowing authorised unit trusts to take advantage of the flexible and modern structure of an open ended investment company.
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The merger of two similar funds can benefit investors and fund managers alike by reducing costs and increasing efficiency.
?These measures are an important contribution to our ongoing assault on red tape and our support for the City as a major financial centre, both within the EU single market and globally?
Notes To Editors
NOR Declarations
1. In general, investors receive interest under deduction of tax, but overseas investors can receive interest gross when they sign a declaration that they are NOR. These arrangements no longer work well with the commercial structures for marketing funds in Europe where typically investments are held by corporate nominees, such as banks, on behalf of the real investor. It will often be difficult for the fund manager to identify who those investors are.
2. Other European competitors are generally allowed to pay interest gross automatically to NORs, or to meet less stringent pre-conditions. The change will redress the balance by removing the requirement for overseas investors to make declarations so long as they invest in a special class of share which is not marketable to UK residents and do so through reputable local intermediaries.
3. In general, where an OEIC pays an interest distribution to an investor, it must deduct tax at 20%. But there are a number of exceptions. For example, if a non-resident investor provides a NOR declaration to the fund that he is not resident in the UK, interest can be paid gross.
4. Although OEICs are companies and investors own shares in them, their distributions can be paid as interest distributions, rather than corporate dividends, where, broadly speaking, more than 60% of the fund's underlying assets are interest-bearing.
5. The changes which are for the next Finance Bill will take immediate effect
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Inheritance Tax
6. Overseas investors are in theory liable to inheritance tax on their OEIC and AUT holdings, because they are regarded as being situated in the UK for tax purposes on the investor's death. Competing centres do not charge tax in parallel circumstances. This very rarely generates any significant yield, because UK assets still have to exceed the inheritance tax threshold, currently £250,000, before any tax is due. But it is a deterrent in marketing terms. Removing the potential inheritance tax charge will help UK managers compete on an equal footing with overseas fund providers.
7. Generally, inheritance tax is charged on the worldwide assets of people domiciled here. For those who are not UK-domiciled the inheritance tax charge on death is confined to UK-situs assets.
8. Most developed countries charge non-residents on locally-situated assets. But there are differences in the assets they include. For example, Luxembourg charges non-residents only on Luxembourg real property. Ireland excludes funds based in the ?Dublin-docks? financial centre. So funds based in either of these centres are not subject to local death duties in the hands of foreign investors.
9. In the UK there is no special inheritance tax treatment of shares in OEICs (or of units in AUTs). They are treated as situated in the UK in the same way as other UK registered shares. That is so even if the ?underlying? assets of the collective investment fund are non-UK assets, as they commonly would be in funds calculated to appeal to non-UK-resident investors.
10. The changes which are for the next Finance Bill will take immediate effect
Stamp Duty and SDRT
11. When OEICs were introduced in 1997 regulations were made that included a temporary exemption to enable an AUT to merge with an existing OEIC without a charge to stamp duty or SDRT. The exemptions were due to come to an end on 30 November.
12. Following discussions with fund mangers, the Government has decided not to withdraw the exemptions but allow them to continue beyond 30 November.
13. The existing exemptions enable the whole of an AUT (or sub-fund of an umbrella AUT) to merge with an existing OEIC (or an existing sub-fund of an umbrella company), without a charge to stamp duty or stamp duty reserve tax. When first made, the exemptions were due to end on 30 June 1999.
14. On 8 December 1998 Patricia Hewitt, who was then Economic Secretary to the Treasury, announced the Government's intention to extend the temporary exemption to one year following the introduction of a wider range of OEICs that could only be marketed within the UK. This was to enable fund managers to delay plans to set up an OEIC, into which they would merge unit trusts, until the regulations permitting a wider range of OEICs were in place. Regulations were made under the Financial Services and Markets Act 2000 introducing the expected wider range of OEICs with effect from 1st December 2001. The stamp duty and SDRT exemption was therefore expected to end on 30 November this year.
15. There is a separate, permanent, exemption for AUTs that convert into an OEIC. That exemption is not affected by this announcement.
16. Media enquires should be directed to HM Treasury press office, tel. 020 7270 4420 or Inland Revenue press office, tel. 020 7438 6692/6706/7327.Non media enquiries: 020 7438 6420/6425