Having “considered the implications” of HM Revenue & Customs’ CGT charge on non-UK resident investors in UK property rich collectives, Canada Life International has “taken the decision to no longer accept new investments” into such funds.
The decision also extends to collective investment funds that “have the potential to be UK property rich collective funds”.
The move was announced on Monday 10 February and came into effect on 11 February.
A total of 313 funds are impacted by the decision.
How is CLI impacted?
The anti-avoidance tax legislation came into force on 6 April 2019 and targets non-UK residents investing in certain UK property funds.
Non-UK companies like Canada Life International, Canada Life International Assurance (Ireland) and CLI Institutional are impacted by the legislation when realising gains from investment funds that invest at least 75% of their assets in UK property.
As the above companies fall within the scope of the legislation, HMRC will tax any gains made on the sale of these funds when they are held in an international investment bond.
These funds may be held directly through the bond, in a portfolio managed by an investment manager or on a platform.
Neil Jones, tax and estate planning specialist, Canada Life, commented: “Restricting access helps policyholders avoid a double tax charge, as they could be liable for tax in the bond for which they won’t get a credit when the bond ends.
“I think it is fair to say that bond providers were caught inadvertently by the rules and the topic has been the subject of meetings between industry bodies and HMRC.
“I have had dialogue direct with HMRC and it is a priority but other matters for them mean I am not sure when it will get resolved, or indeed if at all,” he added.
Ongoing issue
International Adviser first reported on the CGT charge during our annual Fund Links Forum in October.
While discussions have been ongoing with HMRC and HM Treasury to try and resolve the matter, it remains a serious challenge for life companies to administer.
The tax charge was described as “unworkable” by RL360’s head of technical sales, Neil Chadwick, in a recent interview.
It has been suggested that, should HMRC not amend the legislation, the life companies could “vote with their feet” and withdraw all of their investments in UK property rich investment funds.
That could potentially see as much as £2.3bn ($3bn, €2.7bn) walk out the door.
It was hoped that, by raising the issue with the asset managers in attendance at the Fund Links Forum, the two sides of the industry could come together and find a resolution.
That, unfortunately, does not seem to have materialised.
Association view
In his role as chair of the Manx Insurance Authority (MIA), Old Mutual International chief executive Peter Kenny commented: “The decision to introduce non-resident CGT is already manifesting itself in decisions to disinvest or not invest in assets which would trigger an onerous compliance requirement.
“However, it is undoubtedly unfair that the ruling is impacting UK residents who are investing using an offshore bond, leading to a potential double tax charge, where offshore providers pass the effect of the tax change on the UK resident policyholder.
“We are calling on the Treasury – and the new chancellor Rishi Sunak – to put a ‘portfolio exemption’ from UK capital gains tax in place for non-resident investors in UK property.
“International platforms removing UK property fund which are caught by these rules also stems foreign direct investment into UK commercial property and limits the options for savers.”
Kenny added: “Excluding portfolios in this way would align with the US and Australia which offer relief from these kinds of ‘incidental holdings’ in portfolios.”
Domino effect
If the life companies do pull their investments, with April/May 2020 a suggested deadline, it could see other financial services firms follow suit.
As RL360’s Chadwick explained, discretionary fund managers (DFMs) often run exactly the same model portfolio for all their investors.
Those in a wrap of UK bond would be exempt, but anyone invested via an offshore bond would be liable to pay the tax charge.
If a particular asset cannot be included for one client segment, it is possible that the DFM will scrap it for all segments.
An initial £2.3bn could be pulled out of the market, but that figure could go much higher if other firms and investors follow suit.
