Investment Funds
Key points
On 15 March, the UK’s Chancellor of the Exchequer, Jeremy Hunt, delivered the Spring Budget 2023. As set out below, there are a number of important announcements that are of particular relevance to the Investment Funds community.
Sovereign immunity consultation
Readers will remember that on 4 July 2022, the UK government launched a consultation on the UK’s regime for sovereign immunity from UK direct taxation. The UK government’s proposals were to dramatically curtail the existing immunity from UK tax as it applies to sovereign investors (other than with respect to income tax on passive interest income).
The consultation proposal on sovereign immunity has now been dropped, no further action is to be taken, and sovereign investors (with the benefit of immunity) will continue to benefit from exemption on all direct UK tax.
Carried interest – mitigate double taxation
With effect from 6 April 2022, the UK government will help mitigate double taxation liabilities with respect to carried interest. Pursuant to electing into this regime, UK resident investment managers will be able to accelerate their UK tax liabilities in order to align their timing with the position in other jurisdictions where they may obtain double taxation relief.
This should help alleviate a particular concern with respect to dual UK and US tax ‘resident’ carry holders that pay US tax on carry in advance of UK tax on carry (and hereto were unable to rely on the double tax treaty).
VAT – Fund management reform
Following the consultation on proposed reform of the VAT rules on fund management to improve legal clarity and certainty, which closed in February, the government is considering the responses and continuing to discuss the proposals with interested stakeholders. The government will publish its response to the consultation in the coming months.
Amends to Fund and asset holding structures
A number of rules are to be tweaked in order to improve Fund and asset holding structures:
- REITs: as announced in December, amendments will be made to the REIT regime to enhance its competitiveness. Changes include removing the requirement for a REIT to hold a minimum of 3 properties where it holds a single commercial property worth at least GBP 20m, and reducing administrative burdens for certain partnership investors.
- QAHCs: the government will legislate to make a number of targeted changes so that the regime is more widely available to investment fund structures which fall within its intended scope and the rules better achieve their intended effect.
- Genuine Diversity of Ownership (GDO) Rules: the government will make changes to the GDO condition in the QAHC, REIT and Non-Resident Capital Gains (NRCG) rules. The GDO condition is intended to prevent funds that are only open to a small number of predetermined investors from benefitting from those regimes. The changes will improve the operation of the GDO condition for Fund structures involving multiple pooling vehicles.
Definition of ‘Charity’
A ‘charity’ will now be defined as a UK charity, whereas previously this included non-UK Charities and Community Amateur Sports Clubs (CASC) based in the European Union (EU) or European Economic Area (EEA). This change will take effect from 15 March 2023.
This may impact Fund managers and investors, as EU or EEA charities will no longer be able to benefit from certain UK tax reliefs, including ‘institutional investor’ status for REITs, and ‘qualifying institutional investors’ (QII) status for the UK’s substantial shareholding exemption (and similar rules).
Conclusion
The above changes will be warmly received by the Asset management community. Confirmation that the sovereign immunity consultation has been dropped in particular, the concessionary changes to taxation of UK carry holders, and relaxation of some the REIT rules, is excellent news, and shows that the government is willing to address some of the concerns raised by those in the Investment Funds community.
Should you have any queries on the Spring Budget, please reach out to your usual UK tax contact or one of the above authors.
