The Association of Investment Trust Companies (AITC) has called on the Government to equalise the tax treatment of bond income between investment trusts and unit trusts to allow the former to use bonds more widely and increase consumer choice.
“We currently have a situation where because of tax distortions, the creation of investment trust bond funds is commercially unviable because they are unable to compete on a level playing field,” observes Daniel Godfrey, Director General, Association of Investment Trust Companies.
Under current rules, investment trusts pay corporation tax of up to 30% on bond income, whereas unit trusts and open-ended investment companies (OEICs) pay just 20%.
Furthermore, if a unit trust invests 60% or more of its assets in bonds it is eligible for ‘bond fund’ status, giving it the option to pay out income as interest rather than a dividend. This interest is tax deductible, so the bond fund pays little or no corporation tax.
However, investment trusts are not eligible for ‘bond fund’ status so if an investment trust invests 60% or more of its assets in bonds, the income would have to be paid as a dividend and therefore shareholders would find that their income is eroded by up to 30%.
As a consequence of this uneven tax playing field, the AITC estimates that just 2% of the investment trust industry’s £58 billion of assets under management is invested in bonds.
To rectify this situation, the AITC is calling on the government to reduce the corporation tax rate within investment trusts to 20% and allow investment trusts with 60% or more of their assets invested in bonds to pay income as a tax deductible interest distribution.
Mr Godfrey continued: “The need for increased competition and consumer choice means that the case for reform is compelling, and with no wider revenue-raising implications, we urge the Government to take action to remedy this discrepancy.”
A comprehensive report describing the investment fund sector in most key offshore jurisdictions, with details of the regulatory structure, is available in the Tax News Reports Shop at http://www.tax-news.com/reportshop/
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