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.
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?
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.
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
60% or more invested in assets which are debtbased
Loan relationship rules apply: Yes
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.
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.