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Budget 2020: Review of UK's funds regime


The government has announced that it will undertake a wide-ranging review of the UK's funds regime, with a view to examining the case for policy changes in the tax and regulatory framework.

Scope of the review

Other than the release of a consultation document in relation to intermediate entities (AHCs) through which alternative funds hold their assets (discussed further below), the scope of the review remains to be seen.

The government has, however, confirmed that the review will include consideration of the VAT treatment of management services provided to UK funds. The UK has already made some limited changes in this area (with effect from 1 April 2020), but a wider review is welcome both because there is uncertainty in this area due to recent developments in EU case law and because Brexit potentially provides an opportunity for the UK to take a fresh look at how it wants its VAT rules to interact with the fund management sector, independent of EU requirements.

AHCs: consultation document

As the first step in the wider review, the government has released a consultation document entitled 'Tax treatment of asset holding companies in alternative fund structures'. The government explains in that document that they are aware that certain features of the UK tax system currently make the UK a less attractive jurisdiction in which to locate AHCs, and invite responses on how to address these issues with targeted policy changes.

The issues identified in the consultation document include:

  1. The difficulty, particularly in the credit fund context, in ensuring UK companies are only subject to tax on a simple financing margin which reflects their basic function (i.e. passing on investment income to the fund vehicle). 

  2. The limitations of the substantial shareholding exemption (SSE), especially for real estate funds with a mixed investor base who cannot easily determine the percentage of investors who are 'qualifying institutional investors' for the purposes of the SSE.

  3. Also in a real estate context, whether the UK tax treatment of rent received by a UK AHC affects the UK's attractiveness as a location for these entities.

  4. The difficulty in retaining the character of capital gains realised by a UK AHC when these returns are distributed to the fund vehicle.  In this regard, the consultation states that the issue turns on the UK tax rules which treat repurchases of share capital as income distributions for fund participators, and specifically mentions carried interest holders. As various recent changes in tax rules specifically relating to funds have focussed on narrowing the situation in which capital treatment is available for carried interest, it will be interesting to see if this reference in the consultation document reflects any change in approach from the government in relation to the tax treatment of fund managers.

  5. The administrative burden involved in meeting the requisite criteria for the various exemptions from UK interest withholding.

  6. The operation of the UK's hybrid mismatch rules, in particular the 'acting together' provisions and the application of the rules which involve deduction/non-inclusion mismatches to structures involving tax exempt investors. For more on this please click here.


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