By GRAHAM FROST 09/12/2005
The headline grabber this week was Chancellor Gordon Brown's U-Turn on holding residential property and collectibles within pensions. While this move avoids unnecessary complication and the fear individuals would hold inappropriate investments, the announcement was a bombshell for those organisations that had invested time and money in developing systems to cope with what had seemed a certainty. By leaving the announcement until the eleventh hour, Brown has also further dented the public's confidence in there being a stable, tax-efficient long term savings environment in the UK. Despite the pitfalls, the notion of holding residential property in SIPPs at least caught the nation's imagination and prompted many individuals to think about planning for their retirement.
Brown also surprised in his Pre Budget Report by largely ignoring venture capital trusts (VCTs). His brief comment suggested that there will continue to be some tax benefits for VCT subscriptions in the next tax year, but we strongly suspect these will be less generous than the current rules. A full announcement has been held back to the 2006 Budget next March.
However amidst a disappointing week for investors there was a small ray of sunshine - the news that Non-UCITS retail schemes (NURS) are due to be eligible for inclusion in ISAs, PEPs and Child Trust Funds from 27 December 2005*.
The key benefit will be the ability to hold funds investing in commercial property in ISA/PEP portfolios. This means that gains will be tax-free and higher rate taxpayers will have no further tax liability on income received (the fund pays 20% tax on rental income, this cannot be reclaimed by ISA managers as it ‘s classed as a dividend).
| "The key benefit for higher rate taxpayers will be the ability to hold funds investing in commercial property in ISA/PEP portfolios." |
This is good news for higher rate taxpayers as the combination of steady income, low volatility and low correlation to stockmarkets makes commercial property funds a good portfolio diversifier and attractive source of income. Another benefit from this amendment is being able to 'ISA' some funds of funds which do not currently qualify.
Investors should consider whether commercial property funds have a role to play in their portfolio and, if so, whether they will enjoy a tax benefit from holding within an ISA (or PEP if within an existing portfolio).
For those who will not benefit from an ISA tax saving, the planned introduction of Real Estate Investment Trusts (REITs) next year should offer some respite, as these funds are unlikely to suffer internal taxation.
*The regulations will come into force on 27 December providing the amendments remain unopposed in Parliament.