UK Open for Business? Consultations on the Funds Market
Can current UK government consultations be translated into action that delivers an alternative to the traditional fund jurisdictions? Time will tell but the signs are promising.
The UK is already an attractive location for asset management. According to the Investment Association annual survey published in September 2020, the UK’s asset management industry is the largest in Europe and the second largest globally, with around £9.9 trillion assets under management. Enabling the continued growth of this sector for the benefit of the UK economy is a key area of focus for the UK Treasury, especially when aligned to UK funds and asset management firms being key to the management of the savings and pensions of millions of people across the UK, the EU and globally.
As such, the 2020 Budget included an announcement that there would be a review of the UK funds regime to consider reforms which hold the potential to enhance the UK’s attractiveness as a location for asset management and for funds in particular.
Here at IDT, we are keeping an active watch on the progress of these reviews, including the Government’s latest consultations on the tax treatment of Asset Holding Companies (“AHCs”) in alternative fund structures. Launched following a first consultation in 2020, this second stage consultation is due to close on 23rd February. There is an expectation that the UK Treasury will act on the responses to create a more attractive jurisdiction for UK AHCs. Those we have spoken to who are closer to the consultation have certainly indicated that their expectation is also that this will be the case, thus allowing for possible publication in the Finance Bill 2021 later this year.
The responses from the first consultation, following on from announcements in the 2020 Budget, and the details of the current consultation make interesting reading for those involved in this sector and can be found at:
AHCs are companies used as intermediate entities in investment fund structures. Their role is to facilitate the flow of capital, income and gains between investors and underlying investments. As a holding company they enable the consolidation of multiple investments under a single umbrella, ring-fencing the asset within a defined structure. At the present time the traditional locations for AHCs are Luxembourg, Ireland and the Channel Islands, with other jurisdictions providing similar or aligned opportunities for residence. Interestingly, we are aware that some Luxembourg and Dublin based funds are actively looking at alternative locations for the future residence of their funds.
Three important themes arose from the first round of consultation responses, namely:
- a suggestion that the scale of the UK’s asset management sector, its good infrastructure and skilled workforce would make this a competitive location for AHCs if barriers in the UK tax system could be addressed;
- that the establishment of AHCs in the UK could bring economic and fiscal benefits, primarily by bolstering the asset management sector and creating additional jobs in associated service sectors; and
- that there are areas where the UK tax rules currently create barriers to the establishment of AHCs in the UK.
Many respondents agreed with the suggestion that the government address these barriers through a new regime for AHCs (with additional aligned proposed changes to the UK’s existing REIT regime, aiming to make UK REITs even more flexible and attractive as AHCs for real estate investment and dealing with some of the difficult requirements that limit the UK REIT from being the “vehicle of choice” for some investors).
Encouragingly, the responses have been considered positively and there is a recognition that there is a clear policy justification and a strong economic and fiscal case for reform in this area. The current follow-up consultation is focused on detailed design features of a new regime for UK AHCs. This will aim to deliver ‘an appropriately targeted, proportionate and internationally competitive tax regime for AHCs that will remove barriers to the establishment of these companies in the UK’.
We understand that the UK Treasury are keen to progress this into action as soon as possible to enhance the funds market in the UK whilst maintaining alignment to EU legislation. There is a clear driver to support growth across the UK and ensure that the UK remains open for business post Brexit.
It should be noted that whilst UK company law does not permit migration of UK domicile (registration) into or out of the UK, a fund wanting to move their existing AHC into the UK could appoint UK resident directors to manage and control the company in the UK for UK tax purposes whilst the corporate registration remains overseas. A split jurisdiction situation could therefore arise and has been seen in some transaction based structures. Perhaps the greatest opportunity is for new structures taking advantage of the benefits, once the life of an existing fund has expired, so that everything becomes aligned in the UK for tax, company law and regulatory purposes from the outset.
In the meantime, we have visibility of structures utilising UK vehicles as part of a non-UK AHC structures and we continue to provide independent directors to such companies. Despite Covid or Brexit, there remain attractive opportunities for investment in the UK and we have seen these opportunities being taken up.
Another alternative and aligned consultation requests input on the UK Funds Regime in general, which can be found here:
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/955542/REVIEW_OF_THE_UK_FUNDS_REGIME_-_CALL_FOR_INPUT.pdf (responses by 20 April 2021)
Depending on the outcome of these reviews and future legislative (tax, company law and regulatory) changes, we could be moving to a situation where it will be beneficial for both AHCs and fund vehicles to locate in the UK with the added advantage of being able to share resources. These changes may result in additional certainty and stability for structures (particularly in the areas of tax treatment) which can only be good news and would provide a healthy alternative to current EU and other offshore fund locations.
It is interesting to note that in the Foreword to the Review of the UK Funds Regime, the UK Treasury highlights the growth of the number of funds located in the UK as a contributor to the wider levelling up of the economy, by supporting jobs outside London - the asset management sector already having a notable presence across the UK. This is certainly a key aspiration of the current UK Government and one that we support.
As directors of UK incorporated companies with relevant expertise of transaction structures, AHCs, other asset holding vehicles and funds, we have a breadth of relevant experience. We at IDT will continue to follow the consultation and resultant UK changes with interest and will be well placed to provide UK resident independent directors.
No doubt, a lot more detail will follow ahead of this year’s Finance Bill, but there does seem to be an appetite for change that could result in the UK providing a competitive alternative to the traditional locations.
The author, Lionel Zeltser, is an independent director with a specialism in property related transactions and structures, and formal training as a chartered accountant and tax specialist. He is one of a number of IDT team members who act as UK resident independent directors on transaction based UK companies.
