LLM4260 | Corporate members: investment trusts

The first large corporate members were mainly linked to investment trusts. The investment trust supplied indirectly the capital that backed the corporate members. A qualifying investment trust is, generally speaking, exempt from tax on capital gains. To qualify, an investment trust has to meet certain conditions set out in ICAT88/S842. The use of investment trusts at Lloyd’s has declined, largely because of the trend to form integrated Lloyd’s vehicles (LLM1060), which led to difficulties in meeting the diversity conditions in section 842.

The 15% test

The Company Taxation Manual at CTM47000 onwards gives further details of the conditions in section 842 (LLM10000). Particularly significant is ICTA88/S842 (1)(b). This provides that the investment trust must not own a holding in a company that represents more than 15% by value of the investing company’s investments.

Loans by group members

In arriving at this 15%, holdings in a number of companies in one group are aggregated (ICTA88/S842 (1A)(a)). Loans by group members must also be taken into account (ICTA88/S842 (1A)(b)). If a would-be investment trust is a member of a group, then any money owed to it by other members of the group is treated for the purposes of this test as a security, and therefore as part of the investment trust’s holding in the companies owing the money.

Additions to holdings

The 15% test rule refers to the value of the holding at the time when the investment was acquired. However, any addition to the holding, which can include a loan, allows a recalculation at the time of the addition.