Investment funds taxation
What the changes mean for you (PDF)
There are minor updates to the Qualified Investor Scheme, Property Authorised Investment Fund
and Real Estate Investment Trust regimes which were
broadly expected. There is also commitment to ongoing discussions on the
reform of investment trust companies, the offshore funds rules and the Schedule 19 stamp duty
reservee tax regime for
Authorised Investment Funds, plus clarifying the trading vs investment question, and introducing a
Tax Exempt Fund regime, but no further progress.
One potential issue is a possible side-wind of the exemption for foreign
dividends for large and medium sized companies. If AIFs were to qualify for
that exemption, it may lead to loss of access to double tax treaties and
increase the tax cost in the fund, reducing the attractiveness of the UK as
a fund location. It would however be a step closer to the exempt model some
in the industry have sought. If AIFs are carved out then there would be no
impact.
In more detail:
QIS
The draconian tax treatment for certain investors holding >10% of a QIS is
being replaced by a genuine diversity of ownership rule along the lines of
that already implemented for PAIFs. Generally this should make QIS easy to
manage though pension funds and life companies will no longer be able to use
QIS as captive funds.
PAIFs
There were 3 minor clarificatory amendments to the PAIF regime
(1) Where a 'feeder fund' is used to comply with the '10% rule' it will be
exempt from Sch 19 SDRT on unit transactions to ensure a double charge does
not apply, (though the feeder fund will have to 'satisfy certain conditions'
which are not stipulated).
(2) Flexibility for PAIFs to make net payments to other AIFs is granted
which may be administratively simpler if all other investors obtain such
payments net.
(3) Distributions will be subject to the manufactured dividends rules so
they are treated in the same way as comparable payments on other securities
normally paid net of WHT.
REITs
Anti-avoidance measures will be introduced to prevent a group splitting
itself into 2 groups for REIT purposes and obtaining the benefits of the
regime by circumventing the group wide balance of business tests
Our view
In the harshest economic environment most of us have witnessed it is not
surprising that the Government's focus in this PBR is not on tax measures for
the esoteric legislation that impacts pooled funds. Given that the once
relatively simple regime for UK funds now has separate regimes for QIS & PAIFs
with further regimes such as TEFs in the pipeline, and that the offshore funds
rules and investment management exemption rules have been substantially amended
in recent times, that may be just as well.
