With the dividend taxation rules recently changing, Joe McGrath considers whether investors can expect to see an increase in the number of UK-domiciled investment trusts.

Between 2006 and 2009, there were only three new launches of investment companies domiciled in the UK, totalling £136 million. By comparison, there were 54 launches offshore, totalling a mammoth £6,854 million, excluding venture capital trusts.

In the past, UK investment companies were exempt from tax on UK dividend income but could face corporation tax on their overseas dividend income, rental income and interest income.

As a result, shareholders in UK investment companies investing in certain asset classes could potentially face double taxation as the investment company would be taxed on its income inside the company and then shareholders would be taxed again when dividends were paid out.

So investment companies realised that by domiciling offshore, there would be no tax change inside the company.
Ian Sayers, director general of the Association of Investment Companies, says there are a variety of sectors where it has traditionally made sense to domicile the company overseas.

He explains, ‘In the property sector, it made sense to domicile the investment company offshore as this resulted in better returns for shareholders. Today, things are slightly different as investment companies are now exempt from tax on overseas dividends and new rules mean that UK investment companies can eliminate their tax charge on interest income.’

As a result, investors may begin to see further UK launches in the near future as companies wake up to the tax changes, according to the AIC.

Suitability
However, Stephen Peters, investment trusts analyst at Charles Stanley, disagrees. He says that a rush of new onshore launches is unlikely to materialise because there are still too many offshore benefits for those investment trusts that are capital growth orientated.

He explains, ‘The AIC would love to think there is going to be a rush of onshore investment trusts, but I don’t necessarily see it.

‘Look at the ones that have beenlisted offshore – the property ones, infrastructure ones and income-biased ones. The issue we now have is that, in many cases, investors like growth dividends. So, if you raise an offshore company, you can pay those dividends offshore, which is great for non-taxpayers.

‘Until that is resolved, there will still be a number of new launches domiciled in Guernsey. The ones going onshore
will be the ones where dividends are not an issue.’

Regulatory pressures
Of course, there is also the issue of regulatory scrutiny, and most investment trust experts would agree that the least investor friendly trusts are those that are listed on the London Stock Exchange (LSE).

Peters explains, ‘There are less onerous demands on the board if you register offshore. It is always caveat emptor (let the buyer beware). If you are listed on the LSE, you should be less worried.

‘AIM listing requires a slightly lower level of friendliness towards investors, but with Guernsey-domiciled companies there are even lower levels of demands in terms of corporate governance.

‘There are a number of offshore companies where the level of due diligence carried out on them by the board and the focus on shareholders is less than you would expect.’