737 Special investment schemes

Summary

This section makes provision for special investment schemes that are essentially unit trusts which invest a significant proportion of their funds in Irish equities. This requirement ceased on 31 December 2000. The annual income and gains (both realised and unrealised) arising for the benefit of unit holders are liable to a 20 per cent tax charge. No further tax charge arises on the disposal of units by a unit holder. Units in such schemes cannot be issued after 31 December 2000.

Details

Definitions

(1)(a) “inspector”, “ordinary shares”, and “qualifying shares” have the meanings set out in section 723.

“special investment scheme” is defined in terms of an authorised unit trust scheme in respect of which the conditions set out in subsection (2) are met.

“special investment units” are units of the special investment scheme issued to an individual on or after 1 February, 1993 and before 1 January, 2001 by the management company or trustee under an authorised unit trust scheme. The funds of a special investment scheme must be wholly derived from units which fulfil the conditions set out in subsection (3) and in respect of which the unit holders make a declaration of the kind provided for in subsection (4).

“units” although this definition allows for the possibility that participation in a scheme might be evidenced by shares which are not called units, strictly units issued by a special investment scheme should be known as “special investment units” by virtue of subsection (3)(a)

(1)(b) The meaning of “management company” and “trustee” reflect the provisions of section 1(2) of the Unit Trusts Act, 1990.

Special Investment Schemes

(2) The features of a special investment scheme which distinguish it from any other authorised unit trust are —

• participation in the special investment scheme is restricted exclusively to participation by means of the holding of special investment units, and
• up until 31 December 2000 a certain minimum percentage must be invested in Irish equities.

Special Investment Units

(3)(a) The conditions necessary for special investment units are —

• the units must be designated as “special investment units” for the purpose of the unit trust scheme,
• an individual can only invest up to €63,500 in the scheme,
• special investment units must be owned by an individual who is either married or is eighteen years or older,
• the special investment units must be beneficially owned by the purchaser (they must be solely owned except where they are jointly owned by a married couple),
• a married couple can invest jointly in 2 schemes (otherwise an individual is only permitted to invest in one scheme).

(3)(b) References in these conditions to ownership of special investment units are references to the beneficial ownership of such units.

(3)(c) For the purposes of identifying which units are disposed of, where units are acquired at different times, a “last in, first out” rule is applied.

Declaration by investor

(4) The declaration required to be made by the purchaser of special investment units must —

• be signed by the declarer (that is, the unit holder),
• be made on a Revenue approved form,
• declare that at the time of the declaration – the payee is of full age and is beneficially entitled to the investment return on the units; the units are not held jointly where not permitted and the unit holder has made only one special investment (or two such investments where each investment is jointly made with his/her spouse),
• set out the name and address of the beneficial owner,
• contain an undertaking to notify the management company if any required conditions cease to be fulfilled,
• give any further information reasonably required by the Revenue Commissioners.

(5) The management company must retain the declarations for a certain period and if required make them available for inspection by the inspector.

Tax treatment of Special Investment Schemes

(6) Special investment schemes are not collective investment undertakings for the purposes of section 734. Special Investment Schemes are subject to a special taxation regime which ensures that an effective 20 per cent rate of tax applies to the income and gains accruing to the benefit of the unit holders. Special Investment Schemes are not to be charged to the 20 per cent surcharge under section 805 in respect of retained distributable income of discretionary trusts. To ensure that the effective rate of charge is, in fact, no more than 20 per cent, all credits, reliefs and deductions due to the special investment scheme are allowed after the reduction in the charge to tax which ensures an effective 20 per cent rate of charge. The expenses of the special investment scheme that reduce the income or gain of the scheme available for distribution or investment on behalf of unit holders are to be allowed in charging such income or gains to tax.

(7)(c) DIRT is not applied to any interest accruing to a special investment scheme.

(8)(a) Certain adjustments apply to the normal capital gains tax rules so as to broaden the base of the charge in the case of special investment schemes as follows —

• there is a deemed disposal and reacquisition at market value on 31 December each year of all trust assets (this means that unrealised gains are taxed and unrealised losses are allowed each year),
• indexation does not apply,
• gains on Government securities are not exempt (likewise losses on such assets are allowable),
• gains arising on sale of BES shares are exempt (loss relief, however, is preserved for such shares),
• excess allowable capital gains tax losses can be set off against income,
• the provisions of section 581 relating to the “28 day rule” are to continue to operate as if the first 2 measures had not been enacted.

Treatment of capital losses

(8)(b), (bb) Net capital losses of a year of assessment can be set off against income of that year. An excess of such losses can be carried forward to the next year and treated as having accrued in that year. Where the business of a special investment scheme ceases, the unused capital losses of the final year can be carried back and set off in sequence against capital gains of the 3 preceding years.

(9) Dividends received by a special investment scheme in respect of BES shares are not taken into account as income. A special investment scheme cannot be a designated fund for BES purposes.

Tax treatment of unit holder

(10) As regards the unit holder —

• any payment received in respect of the units is exempt from tax,
• any gain arising on the disposal of units is not a chargeable gain, and
• any income tax or capital gains tax paid by the management company can not be imputed to the unit holder.

Relevant Date: Finance Act 2021