IT landscape ‘transformed’ as govt relaxes dividend rule

UK-domiciled investment trusts have been granted greater flexibility in paying out dividends, with vehicles now able to distribute capital profits as income for the first time.

New tax rules set out in the Finance Bill, which came into force at the start of this year, have given investment companies the option of redistributing capital gains into income.

The rule change puts UK-based trusts on an even keel with offshore closed-ended vehicles and VCTs, both of which can boost income through capital growth.

Ian Sayers, the director general of the Association of Investment Companies (AIC), said the rule change could transform the landscape of the UK equity income sector.

“The rule could potentially change UK equity income trusts’ remits as, naturally, if the company has a high income focus then currently you look for the income-generative stocks to get the income,” said Sayers.

“Now given the greater flexibility, investment managers can look to other stocks that do not pay a large dividend, and instead focus on capital growth.”

Sayers said the change has come into effect following discussions between the AIC and the government, with the trade body successfully arguing the new rules would benefit shareholders.

“It is shareholders’ money so it should be up to them and the board to decide what to do with the capital gains,” he said.

Sayers predicted a number of new products will enter the investment trust  universe to take advantage of the rule change.

Older investment companies, such as Jeremy Tigue’s Foreign & Colonial investment trust, founded in 1868, have a distinct advantage over new income-focused products looking to enter the market as they have been able to build up dividend reserves over time in order to enhance income.

New products entering the market do not have this luxury, but they could now gather more assets thanks to the rule change.

“I can see the rule change prompting the launch of different types of products, which start out targeting capital accumulation and then a couple of years down the line introduce an income element,” said Sayers.

“I can also envisage more and more trusts launching fixed income shares – but ultimately it is down to the board and the shareholders to decide how much of an income focus they want to place on the investment company.”