H.M. TREASURY Notes on Clauses

EXPLANATORY NOTE
CLAUSE 62: COURT COMMON INVESTMENT FUNDS

SUMMARY

This clause changes the tax treatment of court common investment funds. From 6 April 1999 court common investment funds will be treated for tax purposes as if they are authorised unit trusts, and not as unauthorised unit trusts. This measure means that the tax system operates in a fairer way for individuals whose funds are under the control of the Courts and are invested in common investment funds.

2. The effect of the measure is that court common investment funds will become chargeable to corporation tax, instead of income tax, on their income and UK dividends received by the funds will not be chargeable to tax. Investors in court common investment funds will receive their income as a dividend with a non-payable tax credit in the same way as other individuals that invest directly in shares, and not as annual payments with basic rate tax deducted. Investors whose income is not within the higher rate tax band will be liable to tax at 10 per cent on their dividend income and the tax credit will continue to satisfy their tax liability on UK dividends. Investors whose income is within the higher rate tax band can set the credit against their tax liability on dividends.

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DETAILS OF THE CLAUSE

3. Subsection (1) of the clause inserts new section 469A into the Taxes Act 1988.

4. New section 469A provides for a court common investment fund to be treated as an authorised unit trust for tax purposes. This means that the common investment fund will be charged to corporation tax on its income and will distribute income to investors as dividends.

The section also provides that the investment manager of the court common investment fund is treated as the trustee of the authorised unit trust and the investors in the court common investment fund are treated as if they were unit holders.

5. Subsection (2) repeals section 328 of the Taxes Act 1988 which provided for the Board to enter into an agreement with the investment manager of a court common investment fund about the tax regime applying to such funds.

6. Subsection (3) is the commencement provision. It brings the changes made by subsections (1) and (2) into effect in relation to income arising on or after 6 April 1999 and for a distribution period beginning on or after 6 April 1999.

7. Subsection (4) is a transitional provision and provides that court common investment funds

in existence on 5 April 1999 cease to be chargeable to income tax on that date

will be chargeable to corporation tax from 6 April 1999 and their first accounting and distribution periods will commence on that date.

8. Subsection (5) defines "common investment fund".

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BACKGROUND

9. Court common investment funds are a form of unit trust set up by the Lord Chancellor under Section 42(1) Administration of Justice Act 1982. The funds are only available for individuals whose money is under the control of certain Courts in England and Wales, for example, road accident victims or mentally incapacitated persons. The Public Trustee as Accountant General of the Supreme Court holds all units in the funds on behalf of investors.

As these funds are not authorised by the Financial Services Authority, they are treated for tax purposes as ‘unauthorised’ unit trusts (UUTs). This means that dividend income arising to the trustees is taxed at the basic rate and investors in the funds receive their income as annual payments after deduction of income tax at the basic rate.

11. The measure introduced by this clause has the effect of treating court common investment funds, from 6 April 1999, as if they were authorised unit trusts for tax purposes. Dividend income received by the trustees will not be chargeable to corporation tax (as is the case for UK companies) and investors in the funds will receive their income as dividends. This means that the tax system operates in a fairer way for individuals whose funds are invested in court common investment funds.

12. The following examples illustrate the position for a court common investment fund and investors in the fund (i) if the clause were not to take effect and (ii) after the clause takes effect.

Assume a court common investment fund receives a dividend of Ł81 with a tax credit of Ł9.

Example (i) Investment in a court common investment fund if the clause were not to take effect

The court common investment fund is charged to income tax on the dividend only at 23% and pays tax of	Ł18.63
(The tax credit of Ł9 is not available to off set the tax charged.)
The court common investment fund distributes income to investors of (81 - 18.63)	Ł62.37
Non-taxpayers claim back the income tax deducted and receive a total return of	Ł81.00
Lower rate taxpayers claim back Ł2.43 tax and receive a total return of	Ł64.80
Basic rate taxpayers have no further tax to pay and receive a total return of	Ł62.37

Example (ii) Investment in court common investment fund after the clause takes effect

The dividend received by court common investment fund is not chargeable to corporation tax (the same position as for UK companies)
(The tax credit of Ł9 remains non-payable.)
The court common investment fund distributes income (as a dividend) to investors of	Ł81.00
Non-taxpayers receive a total return of	Ł81.00
Taxpayers not chargeable to higher rate tax receive a total return of	Ł81.00

The treatment in example (ii) is the same for tax purposes as if those investors had invested directly in shares, authorised unit trusts and open-ended investment companies.