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:
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/947430/201211_AHC_consultation_2_Final_document.pdf
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.
Photo by Simon Rae
on Unsplash
