There's not much good news about at the moment and as one client put it earlier today - you don't often hear "good news" and "tax announcement" in the same sentence. Today's budget seeks to break that trend, at least if you're in the UK investment management industry, and it is therefore with pleasure that we write this note.

Not only did the budget herald good news but it actually presents two separate pieces of good news.

Good news story #1

The Treasury has published a consultation into the tax treatment of asset holding companies within an investment management context.

The condoc states that this "marks the government’s commitment to the sustainability and competitiveness of the UK funds industry". 

Broadly, the consultation seeks to gather evidence and explore the attractiveness of the UK as a location for entities through which alternative funds hold fund assets. 

Within the condoc the Treasury accepts that, despite the UK's generally being an attractive holding company jurisdiction outside of the investment management sector, within the industry there are several challenges that "remain barriers to the establishment of these intermediate fund entities in the UK... which do not exist in some other jurisdictions".

The purpose of the consultation is to understand what these barriers are and to determine what appetite there is for removing such barriers, and if there is appetite, working out what options are available. Not unreasonably, the Treasury would also like to understand what the benefits to the UK will be if funds start using UK asset holding vehicles.

The consultation focuses on three asset classes: credit, real estate and traditional private equity.

1. Credit funds benefit from bespoke securitisation tax regimes in other countries, which ensure taxation on a simple financing margin, which corresponds to the basic function they perform (passing on investment income). Although the UK has a securitisation regime, it was designed for the banking industry and doesn't really work for credit funds because of the fairly strict qualifying conditions. The consultation indicates that the government is considering modifying the regime or even developing specific rules concerning the tax treatment of asset holding vehicles in alternative fund structures.
2. Real estate funds with a mixed investor profile currently face difficulties qualifying for the substantial shareholding exemption for gains on disposals. This consultation therefore seeks views on whether the existing qualifying institutional investor exemption should be expanded, or possibly creating a broader participation exemption by removing the trading conditions at investee level, excluding disposals of UK property rich companies.
3. Private equity funds can have difficulty repatriating profits on disposals whilst retaining the underlying capital gains character of returns (repurchases of shares being treated as income distributions for UK recipients). The government accepts that "this issue is in part a function of UK company law and the constraints this creates, compared to comparable law in other jurisdictions, on the mechanisms through which investment returns can be extracted from a company." 

More generally the condoc also looks to withholding tax on corporate interest and how that impacts UK asset holding vehicles.

Good news story #2

Buried within the Asset Holding Vehicle consultation document is a sentence announcing a technical consultation on the application of the UK's anti-hybrid rules. We understand that the consultation will be published in the coming weeks.

The detail on what this consultation will cover is limited but seeks to address the "unintended and disproportionate impacts on the funds sector" that currently exist.

The consultation will definitely look at the ‘acting together’ provisions (possibly in response to Luxembourg's 10% rules on this subject) and the application of the rules to deduction/non-inclusion outcomes that involve tax exempt investors (at the moment the UK rules apply rather oddly, so that a payment made to a fund that is treated as opaque by an investor who is actually tax exempt is nevertheless caught by the rules). 

HMRC's willingness to engage with these rules is positive and we look forward to reading the technical consultation.