The AIC welcomed the government’s announcement that the ISA limit (£10,200 for tax year 2010-2011) will increase annually in line with inflation. ISAs have been a successful way to encourage long-term saving and tax is very much a current concern for investors so on-going ISA increases are good news for investors. The AIC recently conducted investor confidence research and 45% of active investors and 21% of the general public said changes in the tax rates were the biggest threat to their finances in 2010, so ISAs are becoming increasingly important for investors. The AIC also urged the government to announce the new annual ISA limits as early as possible to allow ISA providers and investors sufficient time to prepare for each new tax year.
In the Budget the government also announced that it intends to review the tax legislation for investment trust companies with a view to modernising the rules and will issue a consultation document in summer 2010. This is an issue the AIC has been lobbying on as the tax rules for investment trusts have been in place since 1965 and are beginning to show their age. The reform of these rules will allow investment trust managers to adopt a more flexible investment approach and reduce costs for consumers.
Presently, to maintain their investment trust status and their exemption from tax on capital gains, investment trusts have to derive 70 per cent of their income from qualifying income, namely shares and securities. Income from other sources such as rental income from property does not qualify so managers are forced to limit their exposure to certain asset classes to comply with this rule. Other changes which are likely to be considered include providing greater certainty to managers over the tax treatment of derivatives, which should also provide greater freedom for investment trusts. As these changes should be tax neutral the AIC are optimistic any future government would wish to take them forward.
Some existing property sectors
Source: Financial Express Analytics
The government in the Budget also announced its intention to work with the VCT sector to examine the evidence for adjusting the rules governing VCT investment. The AIC believes removing restrictions on where VCTs can invest would make it easier for the sector to support smaller and growing businesses in the UK. This would be timely as the withdrawal of banks from small business lending has increased the range of companies which are unable to secure development capital from traditional sources – a problem which VCTs are designed to address. To make changes to the VCT scheme the UK will have to convince the European State Aid authorities that reforms are merited and these moves to gather evidence are a vital first step in this process. The AIC looks forward to working with HM Treasury to develop the evidence base to make these reforms happen.
The AIC believes any future government should take forward these three proposals to support investment company investors. The ISA changes will help encourage saving which is vital to address the inadequate savings of an increasingly ageing population. The investment company tax changes will allow investment trust managers to adopt a more flexible investment approach and reduce costs for consumers at no extra cost to the Government. Finally the VCT changes would not only encourage saving but generate further investment in smaller companies, boosting enterprise and future economic growth in the UK.
Annabel Brodie-Smith is Communidations Director at the Association of Investment Companies. The views expressed are her own. No recommendations are implied.