By Carly Phillips-Jones

Following its call for input on the UK funds regime back in January 2021, on 10 February 2022 HM Treasury published its Review of the UK funds regime: a call for input: Summary of responses.

The primary purpose of the consultation was to identify options that would make the UK a more attractive jurisdiction in which 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 has underpinned two initiatives that the government has taken forward as part of the review:

  • New tax regime for qualifying asset holding companies (QAHCs).
  • Introduction of the Long-Term Asset Fund (LTAF) structure.

The response document summarises the representations received, the government's priorities and the steps it proposes to take to ensure that the UK funds regime review delivers on its objectives. The key proposals that the government intends to take forward are laid out below.

  • Review the genuine diversity of ownership (GDO) condition - The GDO was introduced as a tax requirement to ensure that certain tax benefits only apply to relevant funds which are widely marketed. In the context of the stated objectives and the wider feedback provided by stakeholders, the government has committed to undertaking a review of the GDO condition.
  • Improving tax efficiency of UK authorised funds, particularly, multi-asset funds - The call for input recognised the tax inefficiencies of multi-asset funds mainly due to the tax paid on income from interest-bearing investments and derivative contracts. It also acknowledged that there was a low take-up of the Tax-Elected Fund regime which was intended to remove tax drag within multi-asset funds. The government has confirmed its intention to continue to work on this tax inefficiency and to evaluate the case for a deemed deduction for distributions and a potential tax exemption for UK authorised funds.
  • Reforms to Real Estate Investment Trusts (REITs) – The call for input received strong stakeholder support for reform to the REIT regime and the government intends to establish a new workstream to evaluate these changes. Some of the suggested changes include amending the 3-year development rules in s556 CTA 2010 and removing the requirements for a REIT to hold at least 3 properties. Discussions on the interaction of REITs with the new qualifying asset holding company regime will form a part of the workstream and it will consider whether any of these changes should be made in respect of other types of relevant fund vehicle (e.g. PAIFs).
  • Application process for authorised fund managers – While they remained unconvinced on the merits of a “fast-track” authorisation process, the government and the FCA noted the support for additional guidance from the FCA regarding the application process. The FCA will engage with industry to explore further what authorised fund managers would find helpful in terms of additional information regarding the application process.
  • Distribution of capital by authorised funds - The government supports the development of a wider range of investment products better suited to investors’ needs and will explore further how the distribution of capital from authorised funds could be permitted. The government will establish a cross-agency working group including HMT, HMRC and the FCA to progress the proposal.
  • Promotion of UK’s fund offering abroad – The call for input received feedback across multiple areas to suggest that there needs to be clearer branding and promotion of the UK funds regime to highlight the UK’s offering and its strategic underpinning abroad. The government has committed to further promotion of the UK’s fund offering abroad, including working with industry on further opportunities.
  • New unauthorised contractual scheme fund structure - Prior to the launch of the call for input, the asset management sector made representations to the government pointing out a gap in the range of unauthorised fund structures offered by the UK. Following the consultation, the government has committed to exploring options to introduce a UK-domiciled unauthorised contractual scheme fund structure aimed at professional investors. It is expected that the tax rules for such a scheme would largely replicate the tax rules for co-ownership authorised contractual schemes.
  • VAT – The government acknowledged that the competitiveness of the UK’s VAT regime is a key condition for the UK to be considered an attractive location to domicile funds. Therefore, HMT and HMRC are working towards a consultation on the VAT treatment of fund management fees which will consider options to simplify the regime.
  • LTAF rules – The LTAF rules came into force in November 2021, and the FCA is planning to consult in 2022 on potentially changing the promotion restricts for LTAFs to allow for a broader range of retail investors. The government is continuing to explore any further changes to the way that LTAFs are taxed, and will conduct further discussions with funds industry representatives.

Having set out its initial priorities to improve the UK funds regime, the government continues to welcome further engagement from stakeholders on the proposals that are not being taken forward in the short term and any broader issues affecting the UK funds regime. Further contact should be made via