The AITC has come to an agreement with the Inland Revenue to remove a potential CGT liability which ...
The AITC has come to an agreement with the Inland Revenue to remove a potential CGT liability which has been overhanging investment trusts for the past two years, writes Adam Lewis.
This comes after a year of discussions between the trade body and the Revenue and dates back to the introduction of corporation tax self-assessment (CTSA) for investment trusts in 1999.
Any gains within the portfolio of an investment trust are not subject to CGT. Under section 842 of the Income and Corporation Taxes Act 1988 (ICAT 88), investment trusts have to gain approval every year from the Revenue to retain investment trust status. This status is printed in their accounts to assure shareholders and the market that the trust will not be paying any CGT.
Under the self-assessment regime, the Revenue had wanted to take two years or more to give approval of an investment trust's status in case it decided to open an enquiry following the submission of its tax computation.
Ian Sayers, technical director at the AITC, said: 'Ideally, companies want to tell shareholders in their current accounts they were classed as an investment trust last year. This means the assurance that there are no big tax bills hanging over any gains the company has made throughout the year.'
The AITC's agreement with the Inland Revenue for investment trusts to gain approval of their status as an investment trust within three months has been confirmed by letter, even if the CTSA process takes longer.
Sayers said prior to this arrangement, the Revenue could delay giving a trust approval, even though the issue raised may have no relevance to an 842 approval.
A company has to pass seven tests to gain status as an investment trust, the most important of which are: 70% of its income has come from dividends and interest accumulated; it cannot hold more than 15% in any one company; and it must have paid out most of its received income to shareholders.
Sayers said these are relatively simple tests which can be handled outside the CTSA process but that CTSA legislation had not significantly addressed 842 approval.
Sayers said the AITC raised the issue with the Revenue a year ago as many trust boards were concerned that by not knowing if they were going to retain their status they could not give written assurance to their shareholders and the market in their annual accounts that they would not be paying CGT.
Investment trusts are now back in the position they were in before CTSA was introduced, according to Sayers.
Then, the companies would get their accounts finalised and published, would send their tax computations into the Revenue and would write a forwarding letter asking if, on the basis of the information provided, they could receive their investment trust status.
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