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SDRT and FA 2014

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UK fund managers breathed a sigh of relief on the announcement of the removal of FA 1999 Sch 19 in Budget 2014. Previous requests for the abolition of the stamp duty reserve tax (SDRT) charge, which arose when an investor in a UK fund surrendered his interest to the fund manager, had fallen on deaf ears for over a decade. On 17 July 2014, when FA 2014 received royal assent, Part II of Sch 19 was removed. Yet Parts I, III and IV of Sch 19 remain, along with new legislation for in specie fund distributions; the combination of these causes a silent sting in the tail for the remaining SDRT regime.

The rationale for the removal of the Sch 19 SDRT charge was to align stamp taxes with the wider strategy of increasing competitiveness of the UK for the asset management industry. However, due to the interaction of Sch 19 with the SDRT charge under FA 1986 s 87 (the ‘primary charge’), the revised legislation fails to achieve HMRC’s objectives.

Prior to FA 2014, fund managers of collective investment schemes managing UK and non-UK (unit) trusts and UK open ended investment companies (OEICs) were able to benefit from an exemption from the primary charge when distributing UK equities to an investor, by virtue of an exemption in FA 1986 s 90(1B). The revised s 90(1B) provides an exemption from the primary charge for distributions of UK equities from UK unit trusts and UK OEICs only, providing those distributions are pro rata.

In recent years, transitions that are considered to be pro rata by HMRC have changed from those being a perfect slice of a portfolio with a variance tolerance of 50bps to a perfect slice of a portfolio with just a 2bps tolerance. Anything not considered pro rata is taxed on the value of the entire transitioning portfolio, not the incremental difference. The income gap from the loss of Sch 19 SDRT will need filling and HMRC may soon demand that distributions are perfectly pro rata with no empathy for deviation.

Furthermore, imposing a charge on in specie distributions out of non-UK funds but not on in specie distributions out of a UK equivalent would seem to be discriminatory and a breach of the Treaty on the Functioning of the European Union (TFEU). The TFEU states that ‘the internal market shall comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured’. The general principle behind the free movement of capital stipulates that ‘all restrictions on the movement of capital between member states and between member states and third countries shall be prohibited’, expanding with ‘between member states’ and ‘between member states and third countries’, which means capital movement must contain a cross-border element.

In light of the above, we hope the s 90(1B) amendments are reviewed to merely give with one hand and not take from the other.