Political and regulatory news
Issue 3 - 22 July 2010
Investment trust tax review announced
The Emergency Budget confirmed the coalition Government’s commitment to modernising the tax rules for investment trusts.
The Conservatives kept to their promise of announcing an emergency budget within 50 days of taking office. George Osborne, the new Chancellor of the Coalition Government, unveiled his plans for the UK economy on 22 June. Given the current financial conditions, the announced package of spending cuts and tax rises came as no surprise. The Conservatives and Liberal Democrats united in setting out their headline objective of reducing the budget deficit, currently standing at £155 billion, to zero by 2016. The UK’s borrowing has now reached about £900 billion, equivalent to 62% of GDP. This is set to rise to 70% of GDP by 2013-14, before falling to 67% by 2015-16.
Most of the debt reduction will come from lower spending rather than higher taxes. Austerity measures will hit all government departments hard, with average spending cuts of 25% across the board, with the exception of health and international aid. These will be delivered in part by a two year public sector pay freeze. Tax increases are to include a 2.5% increase in VAT effective from 4 January 2011 and an immediate increase from 18% to 28% in capital gains tax for higher rate taxpayers. The Chancellor also announced a series of reductions in benefits and tax credits.
The news is perhaps more positive for the business sector as the Government strives to stimulate economic growth. It is forecasting growth by 1.2% this year, 2.3% in 2011, 2.8% in 2012, 2.9% in 2013 and 2.7% in both 2014 and in 2015. To assist this process, corporation tax will be cut next year to 27% and by 1% annually for the next three years, the small companies' tax rate will be cut to 20% and the threshold at which employers start to pay National Insurance will rise.
The rise in capital gains tax will make ISAs more attractive and could encourage more retail investors to consider investment options, including investment companies. Where investors have already reached their ISA limits, funds, such as investment companies, will be relatively more tax efficient in comparison with a portfolio of directly held equities.
Of most direct impact for the investment trust sector was the announcement that a modernisation of the tax regime for investment trusts will be taken forward. The current rules have been in place since 1965 and an update will be useful if it is able to secure greater investment flexibility and reduce the sector’s administrative costs.
Disappointingly, the Coalition Government did not confirm its intention to take on Labour’s commitment to reviewing the investment conditions for venture capital trusts. However, the Chancellor’s first statement did not cut off this possibility and the AIC understands that this review is still on the agenda. It will continue to press for an announcement to be made to develop this agenda.
Tough economic conditions continue to prevail. The emergency budget is designed to eliminate the UK’s debt problem and drive the country out of recession. The AIC will continue to work with the Government to ensure that the most favourable conditions possible can be achieved for the investment company sector.
To view the full Budget announcement, click here.
Next article: AIFM Directive agreement delayed
Back to top
Back to Issue 3 - 22 July 2010
