Regulation Changes To ISA And PEP Rules

February 2006

Following promises made in last year's Budget, final regulations on three of the proposed changes to ISA and PEP rules have eventually been made and are now effective.

Non UCITS Retail Schemes (NURS)

NURS, introduced by the COLL sourcebook that came into force in March 2004, include all types of retail collective investment schemes that are not Undertakings for Collective Investment Schemes in Transferable Securities (UCITS). They can include property funds and more wide ranging funds of funds that are not UCITS.

Following the implementation of the final regulations in December 2005, NURS now qualify for inclusion in PEPs and the stocks and shares part of ISAs. This is subject to the proviso that they do not restrict the ability of investors to access their funds to any greater extent than for UCITS funds. This is to ensure that investors are treated equitably across similar types of retail collective investment schemes. Specifically, the Regulations stipulate that the ability of investors to access their funds must not be restricted by more than two weeks by providing that "the redemption of the units or shares …..shall take place no less frequently than bi-monthly". Schemes that apply limited redemption, as defined in COLL, will not therefore be eligible. This requirement should specifically be noted by providers that are aiming to use the FSA rules on limited redemption.

Firms that have funds that are neither UCITS or NURS, may continue to operate them under the old CIS sourcebook until February 2007, by which time they must convert to COLL. This change to the rule has given rise to the expectation that property funds will be popular in the structuring of this year's ISAs. Advisers (and investors) are however warned of the downsides to property investment of 20% tax and non- reclaimable tax credits on dividends. Good advice may be to wait and see what additional benefits may derive from investing in property through a Real Estate Investment Trust (REIT) when they arrive, hopefully, in January 2007. (See our other bulletin on REITS).

Quasi Cash Funds
The 5% "cash-like" test was first introduced in the ISA Regulations to prevent those collective investment scheme products, that manufacture or guarantee a cash-like return, from qualifying for the stocks and shares component, ensuring that they qualify instead for the cash component. The test states that the products to qualify the investor must not be entitled to a secured minimum return on at least 95% of their original capital in the first five years following an investment test. The requirement to apply the test was extended in 2005 to direct investments in shares and securities, but unintentionally, also prevented some types of security based investments from qualifying for the stocks and shares component. To address this these new Regulations dis-apply the 5% cash test rule from all securities, and will continue to do so until such time as the Revenue can accurately limit the application of the test to those securities alone to which it was intended should be affected.

Alternative Finance Arrangements
The third change made by the Regulations follows the introduction by The Finance Act 2005 of the concept of alternative financial arrangements for savings products that provide similar types of return to a deposit savings account. The new Regulations aim to provide those Arrangements, such as Shari'a accounts, with similar treatment within ISAs by including them as qualifying products for the cash component.

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