FSA plan to stop managers sitting on boards will affect business asset taper relief
Managers of investment trusts who also sit on the board of those trusts will face a higher tax charge on any of their own money invested in their portfolios under FSA proposals.
The FSA's consultation paper 164, issued in January this year, aims to remove members of fund management companies from the board of their investment trusts. This creates an issue for small boutique investment management houses, which have often been set up to run a single investment trust and where the managers have much of their wealth in the vehicle.
At present, managers who sit as a director of the trust qualify, as do all directors of a trust, for a 10% rate of CGT if they hold shares in the trust for at least two years, assuming they hold less than 10% of the trust's overall assets.
If FSA proposals go through, these managers and directors will be subject to the normal CGT rate of 40% as their assets will no longer be treated as eligible for business asset taper relief.
Matthew Oakeshott, joint chief executive of OLIM Ltd, both manages and sits on the board of the Value & Income Trust, and said while the group will obey whatever the FSA decides, he questions the mentality of a one size fits all approach. Oakeshott said he and Angela Lascelles founded the trust together and both have substantial holdings in it, making their interests exactly the same as the shareholders. He said it seems nonsense they may not be allowed to sit on the board.
He added: 'The majority of those on the board are independent directors so there are safeguards but shareholders are pleased and comforted that Lascelles and I sit on the board as it shows our interests are the same as theirs.'
Ian Sayers, technical director of the AITC, who recently published a code of corporate governance for investment trusts, said he would like the FSA proposals to affect only external managers of investment trusts whose interests are not entirely in-line with those of the trust and not those trusts which are entirely self-managed.
Sayers said: 'The FSA drafted these rules with the managers from external groups in mind, as in these cases there are more conflicts of interest. We would be against any move for these proposals to affect self-managed trusts where the investment policy of the trust is decided by employees of the trust itself, not a third-party management company.'
Gavin Suggett, chief executive of Alliance Trust, said as a self-managed trust the interests of all the executives who sit on the boards and its employees, are entirely in-line with the shareholders, as if the trusts do badly they will lose their jobs.
He said on the boards of £1.1bn Alliance Trust and the £400m Second Alliance Trust there are five non-executive directors to four executive directors, so the majority of the board is independent.
The AITC's code of corporate governance, the draft of which was released last month, suggests while the majority of a trust should be independent of the manager, there should be one current or recent employee on the board at any one time.
At the AITC director conference last month, a poll was taken at which three out of four directors said there should be at least one director on an investment trust board that represents the management company.
With the majority of recent investment trusts coming from boutiques, these proposals raise some questions about the sector moving forward, especially as many investors like to back a trust the manager has a personal and financial interest in.
Jonathan Fry, managing director of Premier Asset Management, said there is now the potential for existing managers of some of the smaller boutique trusts to sell holdings before the tax changes are made.
This would create unnecessary costs for shareholders, he said.
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