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SAVINGS AND INVESTMENTS

Venture Capital Schemes

The maximum amount on which an investor can obtain relief under the Enterprise Investment Scheme (EIS) in any tax year is to be increased from £400,000 to £500,000. This is, however,subject to State aid approval by the European Commission, so both the increase itself and the start date are not yet certain. For the purposes of the EIS, the Venture Capital Trust (VCT) scheme and the Corporate Venturing Scheme (CVS), the activities of shipbuilding and coal and steel production are to become excluded activities. As a result, investors will not be able to obtain tax relief under these three schemes for investments in companies carrying on any of these activities. For the EIS and CVS this will apply to shares issued on or after 6 April 2008. For VCTs it applies in relation to money raised on or after that date (but not money derived from the investment of money raised before that date).

Enterprise Management Incentives

At present employees cannot hold qualifying Enterprise Management Incentive (EMI) options with a total market value of more than £100,000 at date of grant (taking into account any Company Share Option Plan options also granted to them). For options granted on or after 6 April 2008, this limit is to be increased to £120,000.

For options granted on or after the date of Royal Assent to Finance Act 2008, EMIs will be limited to qualifying companies with fewer than 250 full-time employees. (If a company has parttime employees, a reasonable fraction for each one counts toward the 250 limit.)

Companies involved in shipbuilding, coal and steel production are to be precluded from offering EMIs, though this will not affect options granted before the date of Royal Assent to Finance Act 2008.

Investment Manager Exemption

Finance Bill 2008 will introduce changes to the legislation underpinning the Investment Manager Exemption (IME), which enables non-residents to appoint UK-based investment managers to carry out transactions on their behalf without the risk of exposure to UK tax, provided that certain conditions are met. HMRC will be allowed to make an order designating transactions as ‘investment transactions’ for the purposes of the IME. There will then be a single list of such transactions, which will be available on the HMRC website. In addition, where not all of the transactions carried out in the UK by an investment manager on behalf of a non-resident meet the qualifying conditions, only the non-qualifying transactions will be exposed to UK tax.

Personal Dividends from Non-UK Resident Companies

At present, individuals receiving dividends from non-UK resident companies are not entitled to a tax credit as they would be if the dividend came from a UK resident company. For 2008/09 UK resident individuals and UK and other EEA nationals will be entitled to such tax credits if they own less than a 10% shareholding in the distributing non-UK resident company. The tax credit will be one-ninth of the distribution and will be nonrepayable. It was previously announced that such individuals would be entitled to the tax credit only if their total dividends from non-resident companies was less than £5,000 but this condition has now been dropped.

For 2009/10 onwards, the 10% shareholding condition will no longer apply but tax credits on dividends from non-UK resident companies will be available only if the source country levies a tax on corporate profits similar to UK corporation tax. There will be anti-avoidance measures to deter abuse.

Offshore Funds: New Tax Regime

Legislation will be introduced in Finance Bill 2008 providing for regulations dealing with the taxation of investors in offshore funds.

Currently, offshore funds are required to distribute at least 85% of their income to be regarded as ‘qualifying funds’. Such funds offer investors disposing of their interest favourable tax treatment (the disposal is liable to capital gains tax or corporation tax on chargeable gains, rather than income tax/corporation tax on income, as would otherwise be the case). With effect from a date to be appointed, offshore funds will no longer have to make a distribution but will instead be able to ‘report’ income to investors, who will be subject to tax on that income. Draft regulations, to be published shortly after the Finance Bill, will set out the conditions which an offshore fund must meet to ensure that the disposal of an interest obtains favourable tax treatment.

Property Authorised Investment Funds

New regulations will be introduced to provide a tax regime for investment into real property and certain property companies, which will enable certain authorised investment funds to elect for a tax treatment that will move the point of taxation from the fund to its investors. The regulations will enable a Property Authorised Investment Fund to provide an open-ended fund alternative to the existing closed-ended UK Real Estate Investment Trusts. Funds will have to meet certain conditions in order to qualify for the new regime. They will have to be incorporated as an open-ended investment company, and carry on a property investment business which amounts to at least 60% of the business. They must meet a ‘genuine diversity of ownership’ condition, so that the fund is not limited to or targeted at only a few specified investors. There will also be limits on the holdings of corporate investors and on the type and amount of loan financing in the fund.

Overseas Pension Schemes

Internationally mobile workers in the UK and their employers can obtain tax relief on contributions to non-registered pension schemes based outside the UK. Measures will be introduced to ensure that funds in non-UK schemes that have received UK tax relief are correctly identified for the purposes of the UK tax rules, so that the amount of an employer’s contribution will not affect the calculation of the proportion of an individual’s pension fund that is subject to UK tax rules. For overseas money-purchase schemes this will have effect for employer contributions paid after 11 March 2008, and for overseas defined-benefit schemes from 6 April 2008.

Pensions and Inheritance Tax

An IHT charge will arise on an unauthorised lump sum payment in respect of a pension scheme member in receipt of an annuity or scheme pension, who dies aged 75 or older, on or after 6 April 2008. Any balance of IHT nil-rate band not already used against their estate may be set against the charge. This treatment will also apply to alternatively secured pensions.

Legislation will also be introduced in Finance Bill 2008 to restore IHT protection to UK tax-relieved pension savings in overseas pensions schemes and all savings in certain overseas pension schemes, backdated to 6 April 2006.

Northern Rock ISAs

Finance Bill 2008 will include legislation to allow individuals who withdrew cash from their Northern Rock ISAs between 13 and 19 September 2007 to reinvest them in a new ISA between 18 October 2007 and 5 April 2008.

Manufactured Payments

Finance Bill 2008 will include a targeted anti-avoidance rule, with retrospective effect from 31 January 2008, to deny relief for any manufactured payment paid as part of a scheme or arrangements where one of the main purposes is to secure a tax advantage.