Do investment managers still want to hold cryptoassets?
With slightly unfortunate timing, given recent events in the crypto space, that consultation has now concluded and HMRC has explained how it proposes to make cryptoassets a more attractive asset class (from a tax perspective) for UK investment managers to hold.
There is an interesting question about the extent to which there is real unmet demand in the current environment for investment managers to hold cryptoassets. But if they do want to invest in this area, the ground rules on UK tax at least are now clear. HMRC has confirmed they will expand the list of “investment transactions’” which benefit from the investment management exemption (IME) to include cryptoassets. This change will have effect in relation to transactions entered into during the 2022/2023 tax year for non-corporate entities, and accounting periods open on 31 December 2022 for corporate entities.
As explained in a previous post, the IME means that non-UK resident persons can hire UK investment managers to carry out investment activities without becoming subject to UK tax. This change means that UK investment managers can hold cryptoassets without bringing their non-UK resident investors within the scope of UK tax.
Cryptoassets will be defined in a broad way, based on the OECD’s definition used in the Crypto-Asset Reporting Framework. This includes (but is not limited to):
- exchange tokens;
- utility tokens;
- security tokens;
- smart contracts; and
- non-fungible tokens.
In its summary of responses to the consultation, HMRC notes that the “definition should have the breadth and depth that the industry requires to… enable innovation in this area by offering flexibility to include future products yet to be developed.” On this basis, it is positive that HMRC does not intend to take an overly rigid approach to what cryptoasset transactions will benefit from the IME.
One of HMRC’s key concerns in the consultation was that transactions in land (which do not currently benefit from the IME) should be excluded. While responses to the consultation supported this, it was highlighted that this should not be overly prescriptive as there would be a risk it would exclude assets that reference land or offer an economic exposure to land. This government has confirmed that transactions in cryptoassets which provide rights in relation to other property will also be included in the IME as long as the transaction does not result in the delivery of the property.
Additionally, transactions in cryptoassets which provide rights to things not currently included in the investment transactions list should not benefit from the IME, on the basis that the cryptoasset overlay should not bring new underlying assets within the IME.
HMRC has changed its approach to closed-loop cryptoassets, which will no longer be excluded from the definition of cryptoassets. However, transactions in cryptoassets created or issued by the investment manager, non-UK resident fund or parties connected to them will still be excluded.