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Travers Smith's Alternative Insights: The UK's Autumn 2021 Budget

Travers Smith's Alternative Insights: The UK's Autumn 2021 Budget
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A regular briefing for the alternative asset management industry. 

Last week's Autumn Budget confirmed the UK government's determination to use regulatory change as a key driver of economic growth and recovery. This ambition – which includes important changes to existing rules, as well as entirely new ones – has been evident for some time now. In part linked to Brexit, the government believes there is an opportunity for tax and legal rule-changes to help deliver important policy goals, and has been working hard to draft legislation and regulations that will support that effort.

Many of these changes were confirmed in last week's budget, and there were also a few concrete new announcements – but the rules themselves are still mostly in development stage and did not grab the headlines. Instead, the media's focus was on some significant new spending commitments, and the equally eye-catching corporate and personal tax increases that were announced earlier in the year. But several impending regulatory changes will create risks and opportunities for the alternative asset management sector – and will continue to require active engagement with policymakers as the detailed rules are developed.

We already know that there will be sweeping changes to sustainable finance rules – necessary if the government is to achieve its ambition for London to become the world's first "net zero aligned financial centre". Among the many recent announcements were finalisation of the rules for climate-related reporting by large UK private companies, further announcements on a Sustainability Disclosure Regime and Green Taxonomy, swiftly followed by more concrete proposals on the disclosure and labelling regime for asset managers. These will bring strategic opportunities as well as compliance challenges.

But the government's competitiveness agenda extends much further than green finance. For example, the ongoing review of the UK funds regime is progressing and will soon lead to concrete changes. One important aspect of this drive to make the UK a more attractive place to locate a fund is the proposed new regime for asset holding companies. The government's proposals have already been the subject of two consultations, and draft legislation was published yesterday (4 November). This is welcome, and the suite of tax benefits available to qualifying asset holding companies will be generous.

In a related attempt to make it easier for firms to locate in Britain, the Chancellor also unveiled proposals in the Budget that would help firms to move all or part of their structure to the UK: new rules will allow non-UK incorporated companies to re-domicile to the UK, while maintaining their legal identity – something that is not currently possible under UK law. Among other things, these new rules may help firms who want to move holding companies to the UK.

Other aspects of the review of the UK funds regime are progressing more slowly. For example, a review of the VAT treatment of fund management fees, announced in March 2020, is still awaited. That gives the UK an opportunity to implement a more coherent and internationally competitive approach to VAT on fund management fees, but it will be tricky to get the rules right. Last week, the Chancellor confirmed that the government has not forgotten about this, promising that the review will materialise shortly. Also due "in the coming months" is the government's response to the call for input on the broader elements of the UK funds review. (Our response to that call for input is available here.)

...Regulatory change is going to affect all UK alternative asset managers. Adapting to some of those changes will be challenging, but the good news is that many will create important new opportunities... 

Alongside the funds review, the government has been vocal about the need to channel more private sector investment into long-term, and often less liquid, investments. That could be excellent news for private markets and more recent announcements have pushed this policy goal, including finalisation of the rules for the new Long Term Asset Fund (LTAF) last week. That new structure will be available from 15 November, and some managers are preparing to launch an LTAF imminently.  One stumbling block, however, has been the cap on fees that applies to so-called "defined contribution" pension schemes and there are mixed views in government – and in the pension funds industry – about how performance fees, common in private funds, should be accommodated in that cap. Conscious of this, the government also confirmed in the Budget that it will consult on options for accommodating "well-designed performance fees", including funds with a standard carried interest structure.

Tax incentives for the right kind of investment are also on the table. For example, following a consultation launched in March, the government has announced some changes to the Research & Development (R&D) tax relief regime. This relief will be reformed to better support cutting-edge research methods by expanding the classes of qualifying R&D expenditure eligible to include data and cloud computing costs. This will, we are told, reinforce the UK's status as a 'science superpower' and was swiftly welcomed by the BVCA, the UK's private equity and venture capital industry association.

These and other ongoing work streams continue a post-Brexit theme of the current UK government: to make the asset management sector more internationally competitive, and to facilitate and incentivise its contribution to the government's policy goals. 

Regulatory change – a key tool to drive that agenda – is going to affect all UK alternative asset managers. Adapting to some of those changes will be challenging, but the good news is that many will create important new opportunities.


We are hosting a webinar for Travers Smith clients on the UK's new asset holding company regime - please register your interest if you would like to join us.

For more of our content on alternative asset management, please visit our dedicated online hub.

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A series of regular briefings for the alternative asset management industry.

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