Annex 1: Minor changes in the law Change 40: Charitable companies: approved charitable investments: sections 511, 512,  513 and 1176
This change modernises the list of investments qualifying as approved charitable investments for the purposes of the rules restricting exemptions.
Although the list is based on Part 1 of Schedule 20 to ICTA (qualifying investments), it does not replicate the approach taken in that Part.
Part 1 of Schedule 20 to ICTA defines qualifying investments by specifying certain investments itself, and also by referring to investments falling within Part 1, Part 2 (apart from paragraph 13) or Part 3 of Schedule 1 to the Trustee Investment Act 1961 (TIA 1961).
For trust law purposes TIA 1961 has been largely superseded by the Trustee Act 2000 (TA 2000). TA 2000 increased significantly the range of investments trustees can invest in, and it would be a significant change in the law to allow any investment in accordance with TA 2000 to be treated as an approved charitable investment. But it would be unhelpful to continue to refer for tax purposes to a Schedule to an Act (TIA 1961) that trustees no longer need to refer to for investment purposes.
So the detail of investments covered by Schedule 1 to TIA 1961 is incorporated in sections 511 and 512 in an updated form.
This has been done by referring to the types of investment that a charitable company can hold on “an approved basis”. So investment in, for example, fixed or variable interest securities issued by any of Her Majesty’s Government, the government of any overseas territory within the Commonwealth and the government of any state within (broadly) the European Union (EU) is reduced to securities issued by the government of any state in the EU and of any other state. This is wider, and so (strictly) is a taxpayer-favourable change. And rather than list the large number of individual entities in whose securities a charitable company can hold an approved investment, reference is made to the international entities listed in the directive on the taxation of interest payments. Again, this is a taxpayer-favourable change.
This approach tends to broaden the scope of possible investments, but in a way that is in keeping with HMRC practice in relation to claims that an individual investment should be regarded as qualifying, as set out in paragraph 9(1) of Schedule 20 to ICTA.
When it comes to the ability to hold an approved investment in the securities of (broadly) a non-listed company, the anti-avoidance provisions in Part 4 of Schedule 1 to TIA 1961 have been largely repeated.
A more detailed analysis of where the approved investments in the source legislation appear in the rewritten sections 511 and 512 is as follows:
Paragraph 3(b) of Part 4 of Schedule 1 to TIA 1961 excludes from approved investments shares or debentures which have not paid dividends in each of the preceding five years but deems dividends to have been paid by a company where one of the reasons for its formation is to acquire the control of another company or companies. This exception to the dividend rule is rewritten in section 513(8). “Control” in these circumstances is not defined by TIA. In practice the definition in section 840 of ICTA (rewritten in section 1124) applies and this is now made statute. Section 1124 therefore applies for the purposes of section 513(8) as a result of section 1176(2).
This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.