In the June 2001 issue of International Investment, I wrote about UK Inland Revenue Press Release No...
In the June 2001 issue of International Investment, I wrote about UK Inland Revenue Press Release No. 76/25 April 2001. This contained proposals to change the definition of a recognised stock exchange for tax purposes. After consultation, the Revenue has now confirmed the proposals.
Previously, S841 ICTA 1988 defined a recognised stock exchange for tax purposes as the London Stock Exchange and any non-UK exchange that was approved by an order of the Inland Revenue. Over the years, a large number of stock exchanges were added to a list maintained by the Revenue. In order for a foreign stock exchange to be recognised, it had to apply to the Revenue for addition to the list. Over time, several junior markets in the EU have achieved recognition by the Revenue under a general ruling recognising any stock exchange within the meaning of the word under the law of a country whose main market has been recognised.
Now that responsibility for admission of companies to the UK official list has passed from the London Stock Exchange to the Financial Services Authority, the Revenue have changed their definition of a recognised stock exchange.
Under the new regime, the list of recognised stock exchanges will only include stock exchanges that are listed by a 'competent authority'. Therefore, several EU-based junior markets, such as the Paris Nouveau MarchÃ©, the Frankfurt Neuer Markt, and Nasdaq Europe (formerly Easdaq) are no longer recognised.
The revised interpretation affects pre-17 March Personal Portfolio Bonds that have been endorsed to take advantage of the transitional arrangements in Regulation 3 of the UK Personal Portfolio Bonds (Tax) Regulations 1999 ('transitional bonds').
Because these bonds can only be linked to stocks that are listed on a recognised stock exchange, any bonds that hold stock on the markets mentioned above will need to dispose of their holdings as soon as possible. During the consultation process, representatives of the insurance industry lobbied the Revenue for a concession permitting existing holdings to continue to be held, but the Revenue have not agreed to this. Their reasoning is that it is not their policy to extend concessions to what they perceive as 'tax avoidance' vehicles, even though it has been proven many times over the years that most personal bond holders were genuinely saving for retirement and not trying to circumvent their responsibilities to pay tax.
However, we have to live with the change, and there are likely to be very few individuals affected by it. Policyholders who are affected have three months from 28 November 2001 to remove the link to their bond if they wish to continue to benefit from the transitional provisions. If the policy year-end is less than three months from 28 November, then the time limit is extended to three months after the end of the policy year.
The good news is that shares listed on the above mentioned markets will now be considered as unquoted for capital gains tax purposes. This means that they will benefit from business assets taper relief. Therefore, for disposals after 6 April 2002, only 25% of the chargeable gains will be subject to tax providing the shares have been held for more than two years. This means that it may well be in the policyholder's best interests to have the stock re-registered in their own name to take advantage of these important tax breaks. It is important to note that any transfer of stock out of the bond will count as a withdrawal for tax purposes, but if this falls within the 5% withdrawal allowance, it will not create an immediate tax liability.
Advisers need to revisit clients' portfolios to check their holdings.
Brendan Harper is technical services consultant, Royal & Sun Alliance International Financial Services
This article contains general information only and is not intended to be taken as specific investment or tax advice and is based on the assumption that further information would be required and provides only a guide to some of the relevant routes that an intermediary could cover in advising the client.
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