The Investment Trust (Approved Company) (Tax) Regulations 2011 (the Regulations) have been published. Once the Regulations have been approved by Parliament the process of the modernisation of the investment trust company (ITC) tax regime will have been completed. Corresponding changes are to be made to the Companies Act 2006 provisions relating to investment companies.

The Regulations confirm that the new regime will take effect for accounting periods beginning on or after 1 January 2012. As with the publication of the draft regulations in May of this year, it is pleasing to note that the Government has taken on board comments received from the industry.

ITCs are exempt from UK corporation tax on their chargeable gains, but generally pay tax on income. The conditions for approval as an ITC under the new tax regime remain as summarised in our previous bulletin on the draft regulations (available here).

A reminder of the conditions under the new regime can be found below. The new regime should make the ITC vehicle significantly more attractive for certain investment strategies.

Conditions for approval as an ITC under new tax regime from 1 January 2012

  1. The business of the company must consist of investing its funds in shares, land or other assets with the aim of spreading investment risk and giving members of the company the benefit of the results of the management of its funds (Condition A)
  2. The shares making up the company’s ordinary share capital must be admitted to trading on a “regulated market” (Condition B)
  3. The company must not be a venture capital trust or a REIT (Condition C)
  4. The company must not be a “close company” at any time during any accounting period (close company condition)
  5. The company must not retain more than 15% of its income (regardless of source) for any accounting period (in other words, it must distribute at least 85% of its income for the period) (income distribution condition)

Changes in the final Regulations

A number of changes have made it into the Regulations.

Deemed satisfaction of “spread of risk” and “trading on a regulated market” conditions ā€“ winding up

The regulation which provides that an ITC in the process of being wound-up will still satisfy the ITC conditions (provided no “new investments” are made) has been amended in a number of helpful ways, following input from interested parties (including Herbert Smith):

  • The ITC will now be deemed to meet both the “spread of risk” (Condition A) and the “trading on a regulated market” conditions (Condition B) during the “realisation period”
  • The “realisation period” now lasts from the commencement of the winding up to completion of the winding up (rather than a maximum period of 1 year from commencement of the winding up) (provided that HMRC are satisfied such period is not being “unreasonably prolonged”)
  • Excluded from the definition of “new investments” (which would defeat the ‘deemed’ satisfaction of Conditions A and B) are both the placing on deposit of proceeds of disposal of the ITC’s assets, and the investment of such proceeds in gilts

Breach of the “eligibility conditions”

The draft regulations did not appear to set out the consequences of a breach of Conditions A to C. In the final Regulations it is made clear that breach of one of these conditions will result in the company losing ITC status for the accounting period in which the breach occurs and (unless a fresh application for ITC approval is made) all subsequent periods.

Disposal by an ITC of interest in non-reporting offshore fund

As an ITC is generally subject to tax on income, it would be subject to tax on a disposal of an interest in a “non-reporting” offshore fund (an NRF) (as any gain on such a disposal would be re-characterised as an “offshore income gain” under the UK’s offshore funds rules).

If the following conditions are met throughout the period of ownership, a disposal on or after 1 January 2012 by an ITC of an interest in an NRF will not give rise to a (taxable) offshore income gain:

  • The ITC must have access to the accounts of the NRF
  • The ITC must have had sufficient information about the NRF to enable the ITC to prepare reportable income computations for the NRF (had it been a reporting fund)
  • The ITC has prepared such reportable income computations
  • Any excess of the ITC’s share of the reportable income of the NRF over the ITC’s share of the distributions made by the NRF is included in the amount available for distribution by the ITC for each accounting period of the ITC during the period it has owned the interest in the NRF

The Regulations also provide that an ITC which has an interest in an index-tracking NRF is not charged to tax under the UK offshore fund rules. It will be required that throughout the period of ownership of the NRF, the ITC’s investment policy is to replicate the performance of a “qualifying index” and the investment in the NRF is in line with such investment policy. Broadly, a “qualifying index” is an index based solely on the value of securities listed on a recognised stock exchange or admitted to trading on a regulated market.


Since the ITC consultation was launched in July 2010, it has been clear that the new ITC tax regime would on the whole be a welcome development for the industry. The Government has listened to the views of the industry so that initial concerns with the new regime have been addressed. The new conditions for approval and new “white list” of non-trading transactions provide greater flexibility in terms of the investment strategies that can be operated through an ITC. In addition, the new administrative regime for seeking approval as an ITC is largely welcome. We look forward to publication of HMRC guidance on the new regime.

The Regulations can be found here.