Next steps for UK funds regime review

21 February 2022

On 10 February 2022 HMT published its formal response to its review of the UK funds regime and set out a series of actions it is planning to take forward. The review was initiated as a way to enhance the competitiveness of the asset management sector in a post-Brexit environment. 

In some respects the Government has not waited for the conclusions of the regime. Two key initiatives we have advocated for - the Asset Holding Company (AHC) regime and the Long-Term Asset Fund (LTAF) - are well progressed. 

The review picked up a number of other components and asked respondents to prioritise the issues for reform. The following three areas were cited most frequently.

  1. Introduction of the LTAF - the government can give itself a pat on the back as the new regime came into force from 1 November 2021 providing a new authorised investment fund to support investment in assets which are long-term and illiquid in nature. The government is continuing to explore the tax treatment and potentially widening the scope to retail investors.
  2. New unauthorised professional investor fund regime - in response to a number of calls for a "flexible and tax-efficient" unauthorised fund structures aimed only at professional investors the government is willing to explore an unauthorised contractual scheme. 
  3. VAT treatment of fund management fees - the government reiterated its long-held commitment to consult on this but ruled out a VAT zero-rate for fund management fees. The consultation will focus on other ways to improve and simplify VAT for fund managers and can be expected in the coming months. 

A number of other areas of tax were identified for further work. The Government will build on its recent changes to the REITs regime by setting up a new work stream which will, amongst other items, review the interaction of REITs with the new AHC regime for the next Finance Bill cycle. The Government will also review the genuine diversity of ownership (GDO) condition which is used in a number of different circumstances within tax legislation to ensure a fund is widely marketed and cannot be manipulated for the benefit of a few investors. The condition crops up in the AHC regime and although it is perceived to be drafted for the retail, open ended fund context, it can work in a private closed ended funds context. The condition is also a feature of the LTAF regime so it will be interesting to see where the review takes the Government given the fundamental objective to protect against tax manipulation will not cease. Wider reforms around regulation are also considered in the response, including (as mentioned) the creation of a new unauthorised contractual scheme, further work on the reform of REITs, and more engagement with industry on improvements to the fund authorisation application process.

The overarching objective of this review is to identify options which will make the UK a more attractive location to set up, manage and administer funds, as well as support a wider range of more efficient investments better suited to investors’ needs.