Red tape strangling investment clubs
By Alexander Jolliffe
Financial Times Published: May 28 2004 11:19
Investment clubs - groups of people who band together to invest in the stock market - are complaining that the Inland Revenue is spoiling their hobby by demanding they complete complex tax forms.
John Anderson, who lives in Monmouthshire and belongs to the White Hart investment club, says the Revenue has refused to accept its simplified tax return and has insisted that it use a separate form.
Anderson says that if the tax man continues "with this high-handed attitude towards investment clubs, when the tax income must be minimal, our Treasurer will have to spend untold hours completing these returns".
Anderson, a 72-year-old retired district manager with Prudential, the life assurer, says: "The change imposes onerous duties on the club. It's bureaucratic interference. Red tape is stopping people from enjoying their investments."
But the Revenue says the new forms which clubs fill out were designed in consultation with ProShare, an organisation which promotes share ownership and used to handle investment clubs.
The disclosure throws a spotlight on the taxation of investment clubs. The Revenue requires an official at each club to tell the local tax office that the club exists and to provide an address for correspondence.
A club officer is responsible for keeping a record of the club's dealing in stocks and shares. He or she will share any income, gains or losses between the members in accordance with the rules of the club, and should provide each member with a written statement of these for each tax year.
The statement of a member's share of gains for the year should indicate, for each investment sold, the time it was acquired, and for each member, the date the member joined.
The good news is that the club itself escapes tax. "The general rule is that it is not going to pay corporation tax," says Anita Monteith, a tax consultant at the Institute of Chartered Accountants.
Every member should declare his or her share of income and gains on the self-assessment tax return, and you have to reveal your portion of profits even if it has been retained for re-investment.
But you do not have to declare gains if they - and any other chargeable gains for the year - are below the annual capital gains tax allowance, currently £8,200.
Long-term investors such as Anderson, who has belonged to an investment club for more than 18 years, may have capital gains tax to pay. There are three ways to cut this, says Martin Donn, a personal tax partner at Blick Rothenberg, the accountancy firm.
First, for shares held before April 1998, there is an indexation allowance, which increases the stocks' cost in line with the retail price index, cutting the gain. Second, there is taper relief, which can further reduce CGT; third, investors can use their annual capital gains tax allowance.
The Inland Revenue notes that while taper relief may be available, it will depend on the circumstances of each member.
One thorny issue relates to investors who transfer shares they already own into investment clubs, says Mark Ward, a senior tax manager at BDO Stoy Hayward, the accountancy firm. "If you're joining and you put 200 shares in, that's a disposal for capital gains tax. You could have to pay CGT as if you'd sold them on the day you join."
This is because the transfer to the club is treated as a disposal of an interest in the shares to the other club members, since you no longer own the shares "absolutely". You would own them jointly with other members. The shares would have to be valued at the transfer date to establish the gain or loss for tax purposes.
Of course, many investors may have losses because stock markets fell between 2000 and 2003. Ward adds: "If you made a loss, that could be offset against your gains."
Another potentially tricky issue crops up when members leave. Clubs will pay you the value of your share of the club's investments. Your exit marks a disposal of your share of the investments for capital gains tax purposes. Any taper relief on this gain will be calculated on the basis that you have disposed of a non-business asset, says the Inland Revenue.
All this underlines the importance of having a well-informed, efficient Treasurer to handle the paperwork. Ward says: "The role of the Treasurer in an investment club is absolutely crucial. It has got to be someone who is ready to do the number-crunching."
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