IR17 9 March 1999 STAMP DUTY: UNIT TRUSTS AND OPEN-ENDED INVESTMENT COMPANIES A new stamp duty reserve tax (SDRT) regime will be introduced for dealings in units in unit trust schemes. The new regime will be more straightforward to administer and pave the way for the electronic trading of units, while maintaining a broadly consistent approach between dealings in units and dealings in shares. These changes will apply to transfers of units in unit trust schemes on or after 1 October 1999. The Government will bring in Regulations to introduce an equivalent regime for dealings of shares in open-ended investment companies (oeics) from the same date. DETAILS 1. Purchases and sales of units in unit trusts are generally made directly with unit trust managers. As well as reselling units to new investors, the manager is able to cancel units and create new ones to match demand. This reflects the fact that unit trusts are open-ended and is quite different from the position with company shares. So special Stamp Duty rules are needed for trading of units. 2. The Government's objective is that Stamp Duty should be applied to dealings in units on a broadly consistent basis compared with dealings in shares. This avoids any Stamp Duty incentive to trade in units rather than directly in shares and securities. Existing stamp duty regime 3. The existing stamp duty regime, which dates from 1946, charges Stamp Duty at 0.5 per cent on all surrenders of units to the trust managers. If the manager resells the unit to a new investor there is no further 0.5 per cent charge. This means that there is a single 0.5 per cent Stamp Duty charge on a transfer between two investors, as there is when shares in a company are transferred between two investors - either directly or via a market maker. 4. But where the surrendered units cannot be sold to other investors within two months, the trust managers may claim a refund of the 0.5 per cent duty provided that as a consequence they dispose of a corresponding amount of the trust's underlying assets and cancel the units. This avoids a double charge to Stamp Duty as the sale of underlying assets normally attracts a Stamp Duty charge in its own right. 5. The current regime is complex to operate as every individual surrender is physically stamped and every individual reclaim needs to be associated with a consequential disposal of fund assets. And the regime has been called into question by a recent decision of the High Court. New stamp duty reserve tax regime 6. In view of these problems, the Government has decided to introduce a clear and straightforward stamp duty reserve tax (SDRT) framework for trading in units in unit trusts. As SDRT does not require the physical stamping of documents this change will also facilitate moves enabling units to be traded electronically. 7. As now, there will be a general 0.5 per cent change on all surrenders of units to the trust managers. Where the trust is growing and there are at least as many sales to new investors (including the resale of existing units and the issue of new ones) as there are surrenders, this 0.5 per cent charge will be the final liability. This matches the current system where there is no need for the trust managers to make net disposals of assets. 8. Where the trust is shrinking and there are only surrenders of units and no sales to new investors, then there will be no SDRT charge on the surrenders. This will directly prevent the potential double charge as assets are sold. 9. Where the trust is shrinking, but there are both surrenders of units and sales to new investors, the SDRT charge will be reduced to the extent that the number of surrenders exceeds the number of sales to new investors. That is because it is the extent to which surrenders are greater than sales to new investors which normally leads the trust manager to dispose of underlying trust assets of the trust. Other surrenders - those that are matched by sales to new investors - are in effect transfers between two investors and will be liable to the SDRT charge. Charging and accounting periods 10. The new regime will apply to surrenders after 1 October 1999. SDRT will be charged at 0.5 per cent of the total value of units surrendered to the trust managers in return for cash during each calendar month charging period, subject to the possible reduction referred to in paragraph 9. 11. Where the number of sales of units to new investors during the charging month and the following month is equal to or greater than the number of surrenders during that two month period, the SDRT charge will be the full 0.5 per cent of the value of all surrenders for the charging month. 12. But where the number of sales of units to new investors during the two month period is less than the number of surrenders during that period, the charge will be the reduced amount obtained by applying the following fraction to 0.5 per cent of the value of all surrenders in the charging month: Number of units sold to new investors in the two months ------------------------------------------------------- Number of units surrendered in the two months 13. It is necessary to compare sales and surrenders over a longer period than a month because the resale of a unit must follow its surrender. The two month period achieves broadly the same effect as the two month period for reclaims in the current system. 14. The new regime is more straightforward and easier to administer since unit trust managers will be required to submit a single return for each month. Payment of the SDRT will be required fourteen days after the end of the two month period used in the formula (by which time the number of units sold and surrendered in that period will be known). In specie redemptions 15. Sometimes unit holders are able to take some of the trust's underlying assets in return for redeeming their units rather than taking cash. These are known as in specie redemptions, and generally occur with large institutional investors in unauthorised unit trusts. Such transactions will be excluded from the count of surrenders for the purposes of the SDRT charge set out above. 16. For certain in specie redemptions there will be an SDRT charge on the manager. Where the investor takes a basket of shares in the same proportions as the investments of the unit trust as a whole (a pro-rata redemption) there will not be any SDRT charge. This is because there is no material change in the nature of the assets owned by the investor. But where the in specie redemption is not pro-rata there will be a 0.5 per cent charge on the whole amount. 17. Since, in appropriate cases, the SDRT charge applies to the manager, a parallel provision will ensure that there is no charge on an investor in respect of the transfer of assets under an in specie redemption (whether or not pro rata). NOTES FOR EDITORS High Court Decision 1. On 21 January 1999 in the Chancery Division of the High Court, Mr Justice Park gave judgement in the cases of M & G Securities Limited v the Commissioners of Inland Revenue and Schroder Unit Trusts Limited v Commissioners of Inland Revenue. The Plaintiffs claimed that they were entitled under the 1946 law to repayments of Stamp Duty paid in respect of a number of in specie redemptions. The defendants (the Revenue) denied that the plaintiffs had met the conditions required for them to be entitled to repayments. Mr Justice Park decided in favour of the plaintiffs. The Inland Revenue has served notice of an appeal against this judgement. Open-ended investment companies 2. An open-ended investment company (oeic) is a collective investment vehicle, similar to a unit trust, but set up as a company with variable capital. A Stamp Duty and SDRT regime which broadly mirrors the existing Stamp Duty regime for units in unit trust was introduced for transfers of shares in oeics, by the Stamp Duty and Stamp Duty Reserve Tax (Open-ended Investment Companies) Regulations 1997 (SI 1997/1156). 3. The Government will be amending these Regulations to introduce a regime for oeics which mirrors the new SDRT regime for unit trusts with effect from the same date. Revenue effect 4. The revenue effect of the change is negligible since the new regime will achieve broadly similar results in terms of tax liabilities. INLAND REVENUE PRESS OFFICE Media enquiries to: 0171 438 6692/6706/7327 (Out of hours: 0860 359544) Non-media enquiries to: 0171 438 6420/6425 Inland Revenue information is on the Internet: www.inlandrevenue.gov.uk # = pounds sterling