The UK government announced at Budget 2020 that it would review the UK’s fund regime (the “Review”). In January 2021, the HM Treasury published the Review which set out the objectives and invited stakeholders to provide views on which reforms should be taken forward. On 10 February 2022, the UK government published a summary of responses which outlined the feedback the government received and the government’s conclusions on what will be explored further…
The objective of the Review is to identify options that will make the UK a more attractive jurisdiction to set up, manage and administer funds, as well as support a wider range of more efficient investments better suited to investors’ needs. This objective underpinned two key initiatives that the government has already taken forward as part of the review, namely a new tax regime for qualifying asset holding companies (“QAHCs”) and the FCA’s newly introduced rules for Long-Term Asset Funds (“LTAFs”). The FCA proposes to make the taxation of funds simpler and more efficient, expand the range of investment products available in the UK and explore opportunities to support the wider funds environment.
PROPOSALS AND CONSIDERATIONS FROM THE GOVERNMENT
Key proposals that the government has considered are described below:
- VAT – The government acknowledged that the VAT regime is competitive and a necessary condition for the UK to be an appealing location to domicile funds. As a result, HMT and HMRC will work towards a consultation on the VAT treatment of fund management fees which will consider options to improve and simplify the regime. This will be published in the coming months.
- LTAF: the LTAF rules were introduced in November 2021, to allow for the introduction of LTAFs, a new type of authorised fund for investing in illiquid assets. The FCA is planning to consult in 2022 on potentially changing the restrictions on the promotion of LTAFs to allow distribution to a broader range of retail investors.
- Co-ownership Authorised Contractual Scheme (CoACS): many respondents commented that the introduction of CoACS has been a significant success and has been valuable in facilitating tax efficient pension pooling and Local Government Pension Schemes. Several respondents suggested that the government could do more to improve the attractiveness of CoACS as it is limited due to the uncertainty of their treatment under double tax treaties.
- Investment Trust Companies (ITCs): respondents suggested that the previous tax changes to modernise the tax treatment of ITCs were successful in reducing administrative burdens.
- Tax-Elected Fund (TEF) regime: these were introduced in 2009 to remove tax drag within-multi asset funds by streaming different types of income to investors in an accounting period. Respondents said that, the government needs to find a simple and operationally inexpensive solution to compete with overseas funds. Overall, most respondents were not in favour of a solution which involves the TEF regime, with some respondents being in favour of a low rate of tax for UK authorised funds. However, most said that this was a partial solution, which could cause difficulties around accessing double taxation treaties.
- Tax-exempt fund: the call for input sought views on tax exemption for both authorised and unauthorised fund structures. The government acknowledged that tax exemption would be a major departure from current policy and there is a need to consider the impact that this could have. Most responses agreed that UK funds do largely achieve tax neutrality, but many said that UK tax rules are complex. Most responses said that tax exemption would make the UK funds regime simpler and increase certainty. However, a consensus was not reached on whether the government should adopt tax exemption for authorised funds.
- Real Estate Investment Trusts (REITs): the call for input received strong support to reform the REIT regime. The government intends to remove the requirement for a company to hold at least 3 properties, allowing REITs to hold a single property to make the UK regime more attractive to investors. Additionally, the requirement for REITs to be subject to both the Corporate Interest Restriction test and the interest cover test in section 543 of the Corporations Tax Act (“CTA”) 2010, will be removed. Finally, the 3-year development rule in section 556 CTA 2010 will be amended.
- Unauthorised fund structures: the asset management sector has previously made representations to the government pointing out that there is a gap in the range of unauthorised fund structures offered by the UK. Following the call for input, the government has committed to exploring options to introduce a UK-domiciled unauthorised contractual scheme fund structure aimed at professional investors. The tax rules for this scheme are expected to largely replicate the tax rules for co-ownership authorised contractual schemes.
- Branding and promotion of the UK funds regime: the government has committed to further promotion of the UK’s fund offering abroad that offers a consistent approach to each vehicle and will work with the industry on further opportunities.
- Timescales for fund authorisation: the call for input questioned how the FCA’s timescales for fund authorisation compare internationally and if there is value in providing greater certainty. Respondents suggested that the FCA provide guidance to better inform and prepare firms for what is required of them in their application also including a “fast-track” authorisation process. Although the government remained unconvinced on the merits of a “fast-track” authorisation process, the government and the FCA noted their support for additional guidance and will engage with industry to explore further what authorised fund managers would find helpful.
- Distribution of capital by authorised funds – The government will explore further how the distribution of capital from authorised funds could be permitted and supports the development of a wider range of investment products. The government will establish a cross-agency working group between HMRC, HMT and FCA to progress the proposal.
The FCA will be consulting further on the LTAF regime and has reminded firms that ultimately their role is only effective in making improvements for the regime once LTAFs are actually launched and there is real time data and feedback to work with.
To read the ‘Review of the UK funds regime: a call for input – Summary of responses’ please click here.
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