Budget 2009: A missed opportunity?

However, for those of us with a communications perspective, it can be just as illuminating to see some of the responses to the Budget from organisations across the spectrum and this year there were plenty of repetitions here too. “Missed opportunity” was one of the most popular phrases following this year’s Budget.

From the point of view of the investment company sector, however, this year’s Budget contained a good deal of positive news. In fact whilst much of the Budget post-mortem has not surprisingly focussed on the higher rate of income tax for top earners, there were positive ramifications for the investment company sector here too, although more concrete good news was also delivered elsewhere in the Budget.

The changes to the higher rate of tax to 50 per cent could potentially make zero dividend preference shares of split capital investment companies look tempting from a taxation point of view given that capital gains tax stands at 18 per cent (and zero shares pay no income and are hence not subject to income tax). Whilst the split capital investment company sector we see today is shrinking, it will be interesting to see if the new tax system paves the way for a wave of new issues in the sector, or certainly an evolution of the split capital trust sector.

Indeed, the first split capital investment company, Dualvest, was launched in 1965 out of similar circumstances, namely at a time when capital gains were more lightly taxed than income for certain types of investor. Of course the split capital investment company crisis will remain etched in advisers’ memory, but the splits sector now is in pretty good shape and the listing rule changes will prevent the problems of the past reoccurring.

The main source of celebration for the investment company sector came with the Budget’s announcement of a new tax efficient framework for investment trust companies, which will enable tax-efficient investment in interest bearing assets. This is to be introduced from 1 September 2009 and is an issue that the AIC has lobbied on for a number of years. Investment trusts that opt into the new regime will finally be able to compete on a level playing field with open ended funds when it comes to investing in assets such as bonds. Historically, investment trusts have paid a higher rate of tax on bonds.

The next lobbying challenge the industry faces comes not from the government, but from Brussels. Recent European proposals for the regulation of ‘Alternative Investment Fund Managers’ (AIFM) pose serious threats to the sector.

The Directive from the EU Commission defines an Alternative Investment Fund as any fund which is not regulated as a UCITS fund and will therefore apply to the managers of virtually all the AIC’s Members. The Directive requires funds to have arrangements in place for the redemption of shares, which is not appropriate for closed-ended funds such as investment companies. It also assumes that a fund has a single manager responsible for the entire operation of the fund, both fund management and administration.

Many investment companies choose to separate these activities, or have a multi-manager structure but it is not clear whether the Directive would permit this in the future, due to the nature of the obligations imposed on the AIFM and it undermines the role of the independent Board. The Directive requires an independent valuation of the assets of the fund once a year, and each time shares are issued or redeemed, which will add significant costs to investment companies investing in illiquid assets, such as private equity, property etc.

Just as Budget Day tends to have a familiar ring to it, it’s also always the case that just as one issue closes, another one opens up, and this is certainly the case in the investment company sector at the moment. And as ever, the AIC will be there to argue the industry’s case on the EU proposals over the coming months ahead.

Annabel Brodie-Smith, Communications Director, Association of Investment Companies (AIC). The views expressed here are her own.