Improving the tax efficiency of UK based or UK managed funds
The Government announced in March 2013 along with the Budget that it would be taking various actions to improve the competitiveness of the UK Fund industry.
On 22 July, HM Revenue & Customs ("HMRC") issued three consultative documents affecting the taxation of funds. In this alerter, we summarise the important elements of the three consultative documents.
Tax Withholding on Interest Distributions from UK domiciled Bond Funds
One of the stated objectives in the Government's March announcement was to "allow UK domiciled bond funds to pay gross interest where they are marketed to non-UK residents". HMRC issued a consultative document on how to implement this objective on 22 July.
Currently interest distributions by bond funds are tax deductible for the Fund but are taxed in the hands of UK investors. The Fund deducts basic rate income tax from the interest distributions. No deduction is currently required, broadly, where paid to a non-UK resident investor. However, proving that an investor is non-UK resident is not straightforward, especially where shares/units are held through an intermediary.
There is a concern that this administrative burden is deterring the distribution of shares/units in UK domiciled bond funds to non-UK resident investors and so damaging competitiveness in the international funds arena.
The proposal is that UK domiciled bond funds can make available share/units from which no tax deduction will be made provided that the shares/units are sold through distributors who will market them exclusively outside the UK. The change would apply to shares/units marketed by UK or international distributors provided that the shares/units are only marketed to non-UK resident investors.
Shares/units marketed to UK residents will remain subject to basic rate income tax deduction from interest distributions. If any UK taxpayer becomes a holder of non-UK marketed shares/units, there will be no tax deduction but the share/unit holder will have to account for income tax in his or her self-assessment return in the normal way.
Residence of Offshore Funds and the AIFM Directive
The residence of offshore funds has long been a problematic area.
Section 363A TIOPA 2010 already permits offshore funds which are undertakings for collective investment in transferable securities for the purposes of the UCITS Directive and which are authorised pursuant to Article 5 of the UCITS Directive in a Member State other than the UK to be managed or controlled in the UK without being treated as UK resident.
The Government's proposal is to extend this principle to non-UCITS funds which are offshore funds for the purposes of TIOPA 2010 where the UK based manager exercising management and control is either an AIFM authorised by the FCA or a branch of an AIFM authorised in another Member State. This could be very helpful in clarifying the position of those fund managers seeking to fit within the AIFM Directive regime and who wish to exercise the passport it offers.
Expanding the White List
There is already a white list of transactions which are deemed to be investment transactions even when a Fund is trading. The third consultative document proposes to extend the white list to include transactions in traded life policies and to trading in carbon credit systems beyond the European Community tradable emissions allowance and transferable credits issued pursuant to the Kyoto Protocol.
When will all these helpful changes be made?
All these changes are proposed to take effect in 2014. These come in the wake of various other changes which will also take place in 2014 and which have been included in previous alerters (e.g. the abolition of SDRT in respect of UK funds under Schedule 19 FA 1999).
We welcome all these proposals. If you have any views as to whether the proposals will meet the stated aims or how they might be improved or have any questions please get in touch.