Two new investment schemes have been launched to attract investment management funds to set up in the UK.
Authorised by the Financial Conduct Authority, the new schemes, known as tax transparent funds, have been set up by the government in response to strong commercial demand to increase the competitiveness of the UK investment management (IM) industry and attract funds to the UK.
Forming part of the government’s Investment Management strategy launched at Budget, the schemes aim to build on the UK’s position as the leading centre for fund management in Europe – currently UK firms manage about 33% of all assets under management in the EU.
Boosting funds domiciled in the UK will increase the number of jobs within the professional services that are offered to funds and fund managers e.g. fund administration, compliance, legal advisers, auditors and depositaries.
Investors in tax transparent funds are taxed as though they had invested directly in the assets held by the fund, rather than on a distribution from the fund itself. For investors, the launch of these schemes will have a negligible impact on the amount of UK tax paid.
There are two main benefits of tax transparent funds:
Managers and investors looking to pool assets from funds across Europe, and potentially the world in a single fund will be able to benefit from economies of scale, reducing industry costs and increasing returns to investors. It should also help diversify investments in order to manage risk. These structures are referred to as ‘Master-feeder’ structures. The ‘Master’ fund in such a structure needs to be tax transparent to ensure that all investors are able to receive the correct tax treatment in their home jurisdiction.
UK institutional investors with tax-exempt status, such as a charity or pension funds, will be able to improve returns on their investments through lower rates of foreign withholding tax. The UK has more than 120 double taxation agreements setting out how much tax foreign governments will withhold on payments to different types of UK investors. Investors such as pension funds and charities are often entitled to have less or no tax withheld, but this entitlement is usually lost when investing through a ‘tax opaque’ fund.
The two tax transparent funds, which are available for authorisation from today, are Limited Partnership schemes and Co-ownership schemes.
A co-ownership scheme is a collective investment scheme. The investors own the assets beneficially as tenants in common; the scheme is not legally separate from the investors.
A partnership scheme is a limited partnership established under the Partnership Act 1907 and registered with Companies House. Partnerships widely exist but in order to make them work for tax transparent funds, the existing legislation has been slightly modified.
The government engaged with industry at an early stage in the inception of this policy, worked through the regulatory, tax and insolvency law implications through expert working groups, and formally consulted on the regulations at several stages. It has taken on board industry’s views throughout this engagement process in order to ensure that these vehicles are as competitive as possible.
Financial Secretary to the Treasury Greg Clark said:
Our Investment Management Strategy is another example of the government’s efforts to keep the UK ahead in the global race.
We already have an investment management industry that is a world leader and the launch of the two tax transparent funds today should strengthen the UK’s position as a leading choice for fund domicile.’
These funds won’t reduce the amount of UK tax paid but will improve returns for investors and support the industry.