The new regulated asset pooling vehicle – a UK tax-transparent fund - Mazars - United Kingdom
The new regulated asset pooling vehicle – a UK tax-transparent fund
On the occasion of the March 2011 Budget, HMRC announced that a tax consultation would take place in June this year with a view to introducing a new category of Authorised Investment Fund which would be constituted as a tax-transparent fund (“TTF”) in the UK.
06/12/2011
Our update at the time can be found here.
It was then announced in May that since most of the legislation was required was regulatory, this should be taken forward as a regulatory consultation rather than a tax consultation.
It is now announced that a regulatory consultation document will be published at the end of 2011 (therefore this month) or early next year.
Two types of legal vehicle are provisionally envisaged as becoming available for the new authorisation.
A common contractual fund
Like its European models, we expect that the vehicle will have no separate legal entity, i.e. it will not be a corporate or unit trust vehicle.
Instead, investors will be deemed to be co-owners by virtue of a common contractual deed, investing and assuming liabilities act through the investment manager and custodian. The arrangement will therefore be an agency relationship, similar to the Sha’ria principle of Wakala.
Partnership funds
These funds could be structured as LPs or LLPs, in line with certain currently popular unregulated vehicles.
Tax characteristics
The intention is for the vehicle to have the following tax characteristics, which will align its tax treatment with that of the offshore version of similarly constituted fund vehicles:-
- It will be tax-transparent for the purpose of taxing income, so that ultimate taxation will depend on the tax position of the investor, and allow double tax treaty relief to flow through depending on the treaty between the source country for the income and the investor.
- The common contractual fund version will be opaque for the purpose of tax on chargeable gains, to prevent cumbersome chargeable gains calculations for each investor in respect of the underlying assets, so that investors will only be taxable, if at all, on realisation. It will be subject to the “deemed disposal” regime applicable to UK life insurance companies.
- The partnership version will be tax-transparent for the purpose of chargeable gains.
- It will be outside the scope of the Schedule 19 regime for SDRT on applicable to UK unit trusts and open ended investment companies.
Furthermore, specific reliefs will be introduced to:-
- facilitate transfers of assets into the TTF in term of relief from corporation tax on chargeable gains for life insurance companies effecting such a transfer and a general relief form stamp duty or SDRT on assets transferred to the TTF in exchange for units in itself
- facilitating charity only TTFs by providing relief from stamp duty or SDRT.
A consultation will take place to consider stamp duty or SDRT reliefs in other circumstances.
Since there is at present no legal vehicle to introduce rules about in primary legislation, the Finance Bill 2012 will include regulation making powers which will permit secondary legislation bringing into effect the following proposed rules when the TTF regulatory regime becomes available.
The regulation making powers are widely cast, which means that they could allow changes relating to the chargeable gains and stamp duties implications of collective investment schemes beyond those relating to TTFs.
HMRC has already indicated that it will be simplifying and rewriting the capital gains rules for mergers and reconstructions of Collective Investment Schemes to be simplified.
Although the current rules relating to mergers and reconstructions of collective investment schemes are, if carefully planned, manageable, it should be borne in mind that harmonised cross-border UCITS IV mergers will increase the number of legal structures subject to those reorganisations.
Simplification would therefore be a welcome enhancement in this context. Indeed, broader safe harbour rules in respect of stamp duties and SDRT in such a context would not be out of place.
For more information contact Howard Jones or Carine Beidas .
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