International life companies do not object to paying the capital gains tax (CGT) charge on UK property rich investment funds introduced by HM Treasury in April 2019, RL360’s head of technical services, Neil Chadwick, told International Adviser.
“We’re not disputing the tax charge, it’s just unworkable.
“Not just for us, but it’s wholly unfair for a lot of investors who, had they bought that particular fund direct, would not be in this position.”
What tax?
The UK Property Rich Collective Investment Vehicles (Amendment of the Taxation of Chargeable Gains Act 1992) Regulations 2019 came into force in April and established that non-resident investors in UK property-rich funds are liable to capital gains tax.
A fund is determined as ‘property-rich’ if it has at least 75% of its assets invested in property.
Various representations about the implementation and administration challenges faced by the life industry have been made to HM Treasury and HM Revenue & Customs, Chadwick added.
The continuity of government should “hopefully allow Treasury to work on the issues they were looking at” before the December general election, he said.
Redemptions
The major concern, flagged at International Adviser’s Fund Links Forum in October 2019, was that the tax charge could prompt the life companies and other international financial services providers to pull their investments in these funds.
Which could see around £2.3bn ($3bn, €2.7bn) walk out of the door.
Chadwick stressed that the situation is moving forward and no “line has been drawn in the sand on this just yet”.
“We are hopeful that somebody, somewhere will see sense and realise the unintended consequences.”
But April/May 2020 is a fast approaching deadline and the point at which some companies could “vote with their feet [and] close off their position for the year” rather than wait around for another year, he added.
What is the problem?
“The whole thing has been incredibly badly thought out,” Chadwick said.
“There hasn’t been enough discussion about how the CGT charge would be put in place by the entities it was going to have an impact on.”
And the options available to the life companies range from bad to worse.
They either absorb the charge or pass it on to clients.
If they choose the latter option, it opens up an administrative nightmare.
“Life companies don’t know what the tax charge is going to be until they have added up all of their trades for the entire year,” Chadwick explained.
“We would only know on the 31 December whether or not there would be any tax charge on the life company. Would it be fair for us to deduct that from the policyholder on an ongoing basis?
“And what do you do with that money when you find out there hasn’t been a tax charge at the end of it?”
Not just offshore
Life companies are not the only ones reassessing their investment in UK property rich funds.
As Chadwick explained, discretionary fund managers (DFMs) often run exactly the same model portfolio for all of their investors.
Those in a wrap or UK bond would be exempt from the CGT charge, but anyone invested via an offshore bond would be liable.
“A lot of DFMs will run exactly the same model portfolio for all of their investors. If a certain asset isn’t accepted by one party, they could just dump it across the board for everybody.”
Being considered relatively low risk, UK property “will probably be a mainstream investment for a lot of model portfolios”.
If life companies and DFMs opt to redeem their positions, it could have significant consequences for UK property funds.
Solutions not just problems
But, as Chadwick emphasised, Treasury has the opportunity to remedy the situation.
“Top of the wish list is to get rid of the charge altogether for life company products and others where you have true collective ownership.
“Second to that would be to go back to the fund industry where the issue can be properly managed.”
They would be able to much more easily impose a withholding tax, which the policyholder could claim back, he said.
Chadwick is hopeful that Treasury will “see sense and realise that they’ve just made a bit of an error in judgement on this, eat a bit of humble pie and either roll it back or push it on the fund groups, which is what they should have done in the first place”.
