1.Section 45 provides a power to make regulations that will allow investment trust companies (ITCs) to have the option to treat dividends as distributions of interest, and to provide that such distributions will be treated as interest payments to their shareholders. This will enable investment trust companies to invest in interest bearing assets tax efficiently.
2.Subsection (1) permits regulations to be made allowing companies approved as investment trusts under section 842 of the Income and Corporation Taxes Act 1988 (ICTA) or companies having a reasonable belief that they will be approved as investment trusts under that section, to designate a dividend (or part of a dividend) as an interest distribution. Regulations can also be made so that in the hands of the shareholder, the interest distribution is treated as a payment of yearly interest for an individual or as a loan relationship credit for a company.
3.Subsection (2) provides that the regulation making power includes power to make regulations about:
when a dividend may or may not be treated as an interest distribution;
the maximum amount of a dividend that may be designated as an interest distribution;
when income tax is deducted from the interest distributions;
accounts and record-keeping; and
information that an investment trust or prospective investment trust will be required to provide to its shareholders or other persons such as HM Revenue & Customs (HMRC). It allows for a penalty to be levied by HMRC up to a maximum amount of £3,000 for the failure to provide information.
4.Subsection (3) further expands the power in subsection (1). In particular, it allows for other enactments to be applied (with or without modifications). It also permits provisions to be made with respect to different types of ITCs or shareholder or sets of circumstances.
5.Subsection (5) provides that any regulations are made by the House of Commons and are subject to the negative resolution procedure.
6.Investment trust companies (ITCs) are pooled, risk-spreading investment vehicles constituted as limited liability companies. They are publicly listed and invest in a diversified portfolio of shares and other securities with the aim of providing a return to their shareholders.
7.There are special rules that define an ITC as an investment trust for tax purposes under section 842 of ICTA, which if met, allow the company to receive an exemption from corporation tax on their chargeable gains.
8.The current tax treatment for investment trusts that invest in interest bearing assets is that such income is chargeable to corporation tax. The section provides for regulations to be introduced that will allow investment trusts or prospective investment trusts to receive a tax deduction for the interest distribution that they make to their shareholders. This will then enable them to invest in interest producing assets tax efficiently.
9.The new tax treatment for investment trusts or prospective investment trusts moves the point of taxation for income received from interest bearing assets from the investment trust to the shareholder, with the result that shareholders face broadly the same tax treatment as they would have faced had they owned the interest bearing asset directly.