In January 2021, HM Treasury published a call for input on its review of the UK funds regime (the “Call for Input”). The Call for Input sets out the scope and objectives of the review and invites stakeholders to provide views on which regulatory and taxation reforms should be taken forward and how these should be prioritised for 2021. The review is of particular relevance to UK asset managers, fund administrators and distributors. It covers the UK’s approach to:

  • funds taxation;
  • funds regulation; and
  • opportunities for reform.


HM Treasury has commented that the overarching objective of the review is to identify options which will make the UK a more attractive location to set up, manage and administer funds, and which will support a wider range of more efficient investments better suited to investors’ needs. Recognising that the UK’s robust regulatory regime is a key strength, the government is committed to maintaining its high standards in the wake of not only Brexit but also the current economic climate. Additionally, the government seeks to build on and utilise existing work which has already been developed, such as building on the recommendations of the UK Funds Regime Working Group, which has already made a number of recommendations in their 2019 report to the Asset Management Taskforce.


The UK’s approach to funds taxation

The Call for Input is wide-ranging, covering direct and indirect tax. Nevertheless, a key component of the review as set out in Chapter 2, is to ensure tax neutrality (i.e. an investor being in a similar tax position if they had invested through a fund as opposed to investing directly in the underlying assets of the fund).

This Call for Input is not only forward looking but it also looks retrospectively, seeking input on whether recent reforms to the UK funds taxation regime were actually effective in achieving their aims. In particular, input is sought on some notable reforms such as:

  • the introduction of the tax transparent Co-ownership Authorised Contractual Schemes, which are aimed at institutional investors investing in assets such as securities and real estate; and
  • the changes to the tax rules for unauthorised unit trusts in 2013, which simplified the rules and removed administrative burdens.

This type of input will give the government an opportunity to reflect on and better inform future decision making.

The Call for Input recognises the following main areas of concern and requests firms’ views on:

  • the tax neutrality principle, which does not always hold for funds that are investing in a mix of equity and debt instruments;
  • a perception that there are unnecessary barriers and complexity within the existing Real Estate Investment Trust rules;
  • cases where the UK approach to VAT on fund management services can create incentives for the domicile of funds outside of the UK; and
  • tax treaty benefits historically enjoyed by UK-domiciled funds, which will be of continued importance,

in order to consider making fundamental changes to offer solutions to those concerns.

The UK’s approach to funds regulation

Chapter 3 provides some highlights of the government’s most recent successful reforms, from the creation of private fund limited partnerships, to the 2017 Asset Management Market Study and establishment of the Innovation platform as well as the Asset Management Authorisation Hub, as examples of the government’s and FCA’s commitment to adapt and evolve the regulatory and statutory framework in line with firm and investor needs.

In terms of the scope for change, the Call for Input notes the gaps in a number of fund structures available in the UK, particularly to facilitate investment in long-term, illiquid assets and to meet the needs of alternative investment funds (“AIFs”) for professional investors.

As such, the Call for Input focuses on the following issues:

  • Fund Authorisation. The government comments that it is aware that asset managers marketing funds to professional investors and sophisticated retail investors, who could otherwise invest in unauthorised collective investment schemes, more often than not prefer to use authorised products. As such, the Call for Input is looking for the factors behind the decision on why firms who create fund products, choose authorised or un-authorised fund structures. In particular, input is sought on why some firms when creating fund products targeted at professional investors, consider authorised fund structures most appropriate (considering such professional investors can invest in unauthorised products);
  • Speed to market. Recognising that being able to launch funds quickly and having a clear timeline are vital considerations when setting up a fund, the government is keen to identify opportunities where the authorisation process could be refined and whether further clarity on timelines could be provided. The Call for Input is also looking for views on how the FCA’s timescales compare to fund authorisation’s internationally;
  • Qualified Investor Scheme (“QIS”). As stakeholders have already suggested, a number of changes have been made to the QIS structure to make it more attractive, such as remove requirements for distribution of income. The government and the FCA are keen to understand in detail the limitations of a QIS. Specifically, detail is sought on the impediments that prevent certain products from being launched within this structure, and why a QIS would be the preferred UK structure (rather than, for example, an unauthorised fund). Other Call for Input questions that the government is looking for insight on are how to: (i) expand the types of investment products that can be delivered within the structure; (ii) optimise the QIS sub-fund structure; (iii) whether the borrowing cap should be raised; and (iv) how any changes would ensure that the structure would remain appropriate for sophisticated retail investors.
  • Operational efficiency. The government is looking into the proposal for an optional “Direct2Fund” investor dealing model, that gives investors the option to transact directly with funds and remove the authorised fund manager as a counterparty to the investor deal – which would also be in line with other jurisdictions. The Call for Input has provided an update on this proposal commenting that there has been close engagement between the FCA and industry on the steps to implement this new model.

Opportunities for reform

Chapter 4 of the Call for Input asks for views on issues that cut across the tax and regulatory elements of the UK funds regime, and on aspects of the wider environment relevant to the regime’s utility and appeal.

The key opportunities for reform relate to matters including the following:

  • Defining opportunities for reform. Stakeholders have informed the government that the lack of passporting rights and access to the EU market means that the UK may not be competitive for retail funds internationally. As a result, the government is looking for input on whether the UK funds regime should focus on appealing to AIFs targeting internal markets to enhance the UK’s reputation as a location for AIFs, as market access faced by retail funds do not apply to the same extent.
  • Enhancing existing fund structures. As the government is not aware of any barriers for Investment Trust Companies investing in long term assets, the Call for Input is looking for input on the reasoning behind why asset manages choose open or close ended structures for a given strategy, in particular illiquid assets. In order to get better insight into an industry suggestion to require asset managers to justify their use of either open or closed ended structures, the government is also looking how effective of a requirement this would be in resulting in products performing more reliably.
  • Distribution of capital. Acknowledging industry feedback on the request to remove the current restriction for authorised funds to be able to distribute capital, the Call for Input is requesting views on whether distribution out of capital should be permitted. And if this were to be permitted, the government is also looking for views on what types of products would facilitate the removal of the restriction as well as what the possible advantages, disadvantages and risks for investors are.
  • New fund structures:
    • the focus for this particular Call for Input specifically considers the tax implications of the new long-term asset fund structure (“LTAF”) (a proposed new authorised open-ended fund structure designed to enable investors, particularly DC pension schemes, to more confidently invest in illiquid assets (such as venture capital and infrastructure) than they can using existing fund structures). In particular, the government is looking to see if there are any issues with the LTAF adopting the current tax rules for authorised investment funds that might be foreseen to lead to tax inefficient outcomes; and
    • additionally, industry proposals for unauthorised funds are also being considered. Proposals have suggested that the new vehicle should target professional investors only and be able to take multiple legal forms, being structured either as a corporate or a limited partnership (having flexibility to be structured either as closed or open-ended and on whether they are listed or unlisted) or even as a contractual scheme. (Only a closed ended structure and would not be listed but would have tradable units). Proposals for all three structures suggest that they should be unconstrained in terms of eligible asset classes and investment strategies. The Call for Input is looking for views on what each structure would allow fund managers and investors to do that they are unable to currently do in the UK regime and whether these structures should have flexibility on whether they are open or closed ended.


With some interesting developments, in particular the proposed new structures, firms are encouraged to respond. The government has stated that it is welcoming views from all interested parties to this initial Call for Input, with a deadline for comments to be received by 20 April 2021. Responses relating to matters within their remit will be shared with the FCA for use in their policy development. Noting that confidentiality of sensitive information is key, the government has reassured any potential respondents that sensitive information will be handled with caution and appropriately in line with the sensitivity of the matters disclosed.

The government will analyse responses and consult on any specific proposals for reform. As the government has more limited resources, it has specifically requested for respondents to focus on the top 3 priority proposals that it should be focusing on for reform.

Please click here to read the Call for Input in full.

For more information, and any guidance or advice on the UK funds regime, Cleveland & Co External in-house counselTM, your specialist outsourced legal team, are here to help.