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Taxation of company-owned collectives

This article briefly highlights how a UK collective that is an authorised investment fund will be taxed when owned by a corporate investor. This includes unwrapped investments on Old Mutual Wealth's Platform.

Background

In 2008 the loan relationship rules began to apply to company owned life assurance policies.  This article seeks to clarify the tax position for UK company investments into collectives.

Loan relationship rules

Following the introduction of the loan relationship rules for company-owned life assurance policies in the 2008 Budget, many financial advisers have asked what the taxation treatment of a UK collective is when held by a company.

How is a company-owned UK collective taxed?

Gains

If more than 60% of the value of the underlying investments is at any time represented by investments which make interest distributions (eg debt, deposit or fixed interest type investments) then the collective will be taxed under the loan relationship rules.

However, where the underlying investments are more than 40% equity ­based and make dividend distributions, the loan relationship rules will not apply. The collective will benefit from a gross roll­up basis on capital gains inasmuch as any capital gain will not be chargeable until the gain is actually realised. It is also a requirement that the underlying equity investments do not fall below the threshold at any time, ie 40%. 

Realised gains would benefit from Retail Prices Index (RPI) indexation relief (which is still available to corporate investors) – but bear in mind that a fund switch would be a disposal for tax purposes.

Income

There would be no corporation tax liability on that part of a UK dividend treated as exempt ABGH distributions (previously known as franked investment income). Any other distributions received (including income automatically reinvested through accumulation units) could be liable to additional corporation tax on an arising basis. This is because the requirement is based on the whole company accounting period and not just at inception.

A tax certificate will accompany any dividend payments and will normally provide the dividend distribution details. However, to identify any element where additional tax may be due, there will be a requirement to review the actual fund manager’s report and accounts. This information is usually available from the fund group’s own website. 

Minimum equity holding

Investment criteria:

60% or more invested in assets which are debt­based

Loan relationship rules apply: Yes

Investment criteria:

40% or more invested in assets which are not debt­base

Loan relationship rules apply: No

Care should be taken not to select investment funds that could potentially breach the 60/40 requirement if application of the loan relationship rules is to be avoided.

Summary

The taxation of a company­owned UK collective will be affected by the accounting practice of the company and is an area which should be discussed with the company’s accountants.

The loan relationship rules can now apply to life assurance investments and collectives. An equity­backed investment will have a different risk profile from a cash/debt­based investment and this should be considered along with other associated risks when advising on company investments.

The information provided in this article is not intended to offer advice.

It is based on Old Mutual Wealth's interpretation of the relevant law and is correct at the date shown at the top of this article. While we believe this interpretation to be correct, we cannot guarantee it. Old Mutual Wealth cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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