A regular briefing for the alternative asset management industry - Issue 32
Last month, the UK government made some important announcements about its post-Brexit plans to re-vamp the funds regime. Many alternative asset managers will be disappointed that a number of industry suggestions have not (yet) been taken up.
For the last two years, the Treasury has been reviewing the UK funds regime. Its aim is to make the UK "a more attractive location to set up, manage and administer funds and to support a wider range of more efficient investments better suited to investor needs". This review had already yielded some tangible results: in particular, the recent introduction of the Long-Term Asset Fund (LTAF) and the development of a promising new tax regime for qualifying asset holding companies (QAHCs) which will come into force in April. In addition, the latest announcements confirmed that the government is taking forward a new fund structure, the Professional Investor Fund – which will be welcome news in the real estate funds industry. However, for most private fund managers, there was not much to write home about.
The government's latest publication follows a "call for input", issued in January 2021, seeking stakeholder feedback on potentially wide-ranging tax and regulatory reforms. The government received input from across the asset management sector, including from Travers Smith, with suggestions ranging from reforms to limited partnership law to recommendations for VAT on fund management fees. Having considered these responses, the government has now made clear which suggestions it will take forward – and those which it will not.
It is fair to say that a number of helpful initiatives were confirmed in the February announcements. For example, the government remains committed to work that should facilitate uptake of the LTAF. This could be a useful structure for private funds that wish to access capital from defined contribution pension schemes, insurers, and wealthy individuals but – as the government acknowledges – establishment of the structure is only the first step. The ongoing workstreams include assessment of the case for further changes to the tax rules, and regulatory reforms to facilitate distribution to a wider range of retail investors.
In addition, and very importantly for real estate funds, the government says that it will create a new form of unauthorised fund, which would be suitable for professional investors. This "Professional Investor Fund", advocated by industry experts and associations, will be an onshore closed-ended or hybrid vehicle for institutional investors – but, although available for other underlying assets, it will be mainly of interest to funds holding UK real estate. The government further confirmed that helpful changes to the rules for Real Estate Investment Trusts (REITs) are also under active consideration, in addition to those already coming into effect next month.
Meanwhile, many other ideas were put on ice or rejected altogether – perhaps most significantly a suggestion to zero-rate VAT on management fees. Although restating a commitment to publish a consultation on the VAT treatment of fund management fees in the coming months, the government has concluded that it will not go so far as to allow fund management businesses to recover their own VAT while not having to charge it to their UK clients. That means that the rules will continue to incentivise UK fund managers to use non-UK private fund structures over equivalent UK ones – broadly, because doing so allows them to achieve VAT treatment which has a similar effect to zero-rating.
An important suggestion made by the private equity and venture capital industry was for a bespoke tax regime to address the decline of UK-domiciled limited partnership funds, and specific legal reforms to limited partnership law, including the option for limited partnership funds to have legal personality. However, while affirming that it wants to support the limited partnership structure and to ensure that it works efficiently for investors, the government is not proposing to take forward any of these reform proposals at this time – although it says the door is open to further discussion.
The declared intentions of the government are undoubtedly positive for the alternative investment funds market. Building on the UK's already world-leading financial services sector by making changes to improve the competitiveness of the tax, legal and regulatory environment is a priority. There is also a clear recognition that private capital is an attractive asset class, offering the potential to boost returns to savers while also contributing to growth in the real economy. Recent initiatives have demonstrated a willingness to legislate at speed to capitalise on opportunities, and the UK's new holding company regime – which, incidentally, might itself benefit from the latest proposals to require more substance in entities established in the EU – is a good example (although some technical issues still need to be ironed out by the tax authority).
However, many of the suggestions rejected by the government in this latest review could have made a difference to firms who are looking at their international structures in a post-Brexit world. It is important that the constructive dialogue continues and that the best of these suggestions live to fight another day.