Funds Taxation - March 2013 UK Government Budget Announcements

The Budget 2013 has announced the following changes in the area of the UK taxation of investment funds. The changes are divided between Finance 2013 changes and Finance 2014 changes.

1. Introduction

The Budget 2013 has announced the following changes in the area of the UK taxation of investment funds.  The changes are divided between Finance 2013 changes and Finance 2014 changes.  The two major changes are:-

• The abolition of stamp taxes on UK funds in 2014 to be included in Finance Act 2014;
  
  
• Consultation on permitting UK bond funds always to pay interest distributions gross when only marketed to non-UK investors with legislation on this to be included in Finance Act 2014.

 

2. Finance Act 2013 changes

2.1 Offshore Funds (i.e. non-UK investment funds)

(a)  There has been a change from 3.00 pm 20 March 2013 in relation to the merger of offshore funds.  It has not been possible to merge a non-reporting offshore fund with a reporting offshore fund without crystallising the pregnant offshore income gains.  It has been possible to convert a non-reporting fund into a reporting fund and then merge that reporting fund with another reporting fund.  However, it has not been clear in such circumstances whether the effect in this   case is to wash out the offshore income gains and convert them into capital gains or not and it has also not been made clear whether an HMRC clearance would be obtained where this is necessary.  The Offshore Funds (Tax) (Amendment) Regulations 2013 take effect at 3.00 pm 20 March 2013 to make it clear that such mergers are effective to prevent the crystallisation of pregnant offshore income gains and that these offshore income gains are not washed out.  This amendment was requested and obtained by Field Fisher Waterhouse LLP.

(b) There will be a consultation on some remaining changes to the offshore fund rules which will then be effective from 30 June 2013:-

• a mismatch between the rules for calculating the total reported income and the amount reported to individual investors;
  
  

• a correction where the offshore fund returns the capital cost of a new subscription under full equalisation so that the capital returned can be set against the first distribution;
  
  

• a change to allow excess expenses of one computation period to be set against income of another within the same reporting period.
  
  

2.2 Onshore and Offshore Funds

It is likely that the law for the new UK based fund vehicles "authorised contractual funds "which are tax transparent will come into effect in May 2013.  The three sets of regulations relating to capital gains tax, stamp tax and VAT will come into effect at the same time.  These will bring into effect all the changes in the rules on mergers with the new provisions replacing the existing Sections 135 and 136 TCGA 1992 in relation to onshore and offshore funds. 

2.3 UK Unauthorised Unit Trusts

The provisions already announced for UK unauthorised unit trusts remain unchanged.

3. Finance Act 2014 Changes

3.1 Onshore Funds/SDRT

There will be an abolition of the Schedule 19 SDRT charge on UK funds in the Finance Act 2014.  There will therefore be no UK stamp taxes in respect of shares/units in UK funds which will remove one of the major disincentives for using UK funds.

3.2 Bond Funds

There will be consultation to allow UK bond funds to be able to always pay interest distributions gross when marketed only to non-UK investors.  Legislation will be included in Finance Act 2014.

3.3 Section 363A TIOPA 2010

There will be consultation on the above section to widen its scope to provide certainty that locating fund management in the UK will not result in the risk that funds might be deemed UK tax resident.  These changes will also be in the Finance Act 2014. 

3.4 Investment Management Exemption

There will be consultation on extending the white list.