New Pensions Regime from 6 April 2006 (A-Day)
The new regime has already been legislated for in Finance Acts 2004 and 2005 and numerous regulations made by statutory instrument, and is well-publicised. Additional measures are to be included in Finance Act 2006. These had already been announced prior to Budget Day (see, for example, the Pre-Budget Report on 5 December 2005 and www.hmrc.gov.uk/pensionschemes/pts-measures.htm) and include the following ‘anti-abuse’ measures:

• the removal of tax advantages for self-directed pension schemes of investing in residential property and in assets such as fine wines, classic cars and antiques;
• measures to deter the artificial boosting of pension funds by the recycling of tax-free lump sums (see www.hmrc.gov.uk/budget2006/recycling.pdf for latest draft legislation).

UK Real Estate Investment Trusts
With effect from 1 January 2007, companies and groups of companies whose main business is property investment, and who meet the necessary conditions, will be able to elect for special rules to apply to their property business and to their distributions. Those that elect will be known as UK-REITs (real estate investment trusts). Qualifying rental income and gains made on the disposal of investment property will be exempt from corporation tax and dividends paid, to the extent that they relate to tax-exempt profits, will be treated for UK tax purposes as income from property and will be paid under deduction of tax.

Profits and gains on any other activity carried on by the REIT will be subject to corporation tax in the normal way and dividends paid out of other profits will be treated as normal dividends for UK tax purposes.

To come within the UK-REIT regime, at least 90% of the company’s tax-exempt profits must be distributed each year and, in addition, various other conditions must be met.

With regard to the company:

• it must be UK resident for tax purposes;
• its shares must be listed on a recognised stock exchange; and
• no one investor may be beneficially entitled to 10% or more of the distributions or control directly or indirectly 10% or more of the share capital or voting rights.
  The conditions that relate to the business are that:
• 75% or more of its assets must be investment property;
• 75% or more of its income must be rental income; and
• the ratio of interest on loans to fund the tax-exempt business to rental income of that business must be less than 1.25:1.

Companies or groups wanting to become REITs must pay an entry charge of 2% of the market value of their investment properties at the date they join the scheme. This charge will be collected at the same time as any corporation tax due for the first accounting period to which the scheme applies or by instalments over four years if the company so applies.

The legislation relating to housing investment trusts (ICTA 1988, ss 508A–508B) will be repealed at the same time as REITs come into force.

Venture Capital Schemes
The rate of income tax relief for investors in venture capital trusts (VCTs) is decreased from 40% to 30% in relation to shares issued on or after 6 April 2006, and the minimum period for which investors must retain the shares is increased from three years to five in relation to such shares. At present, a VCT is required to have 70% by value of its investments represented by shares or securities in qualifying holdings and can have no more than 15% of its total investments in any one company; from 6 April 2007, any money held by a VCT or on its behalf will be treated as an investment for the purposes of these tests. There is a significant change to the ‘gross assets’ test, which determines the size of company a VCT may invest in; in relation to investment of funds raised after 5 April 2006, the relevant assets of the investee company must not exceed £7 million immediately before the investment and £8 million immediately afterwards. These limits were previously £15 million and £16 million respectively.

Relief is currently available under the enterprise investment scheme (EIS) on investment of up to £200,000 per tax year. With effect for shares issued on or after 6 April 2006, this limit is increased to £400,000. The amount that may be carried back to the previous tax year is similarly increased from £25,000 to £50,000. The above changes to the ‘gross assets’ test apply also for EIS purposes; they apply to shares issued on or after 6 April 2006 unless they were subscribed for before 22 March 2006. As regards investments made by approved investment funds, the changes to the test will not apply if the Fund was approved before 22 March 2006 and raising money before 6 April 2006.

The above changes to the ‘gross assets’ test apply also to the corporate venturing scheme (CVS); they apply to shares issued on or after 6 April 2006 unless they were subscribed for before 22 March 2006.

Alternative Finance Arrangements
Finance Act 2005 introduced legislation to deal with finance arrangements that are structured so that they do not involve the payment or receipt of interest. It enabled certain financial arrangements to be taxed in a manner similar to those involving interest but which do not go counter to Islamic law prohibitions. It also ensured that other rules relating to interest, such as deduction of tax at source, apply in the same way as other finance arrangements.

New provisions will amend and build on FA 2005 by providing for two additional alternative finance arrangements to be taxed on a level playing field to products involving interest. These provisions relate to an agency-style contract, which is equivalent to a saving account, and a partnership-style arrangement used to finance the purchase of property or other assets. This will be achieved by providing that, where certain conditions are met, amounts equating economically to interest that are paid by the financial institution to the investor, or received by the financial institution, are to be charged to tax on the same basis as interest.

In addition, the proposed revision also amends FA 2005 to provide that low cost alternative finance arrangements provided by employers to employees are treated in the same way as conventional low-interest loans to employees, where existing legislation provides that a taxable benefit in kind arises from a ‘taxable cheap loan’ made to an employee. The difference between the amount of interest actually payable, and the amount of interest that would be payable at the official rate, represents the taxable benefit.

The provision relating to alternative finance arrangements made available to employees will apply to arrangements entered into on or after 22 March 2006. The remaining provisions apply to arrangements entered into on or after 6 April 2006 for income tax purposes and 1 April 2006 for corporation tax purposes.