John Forbes explains more about the review of the UK funds regime

In the 2020 Budget a year ago, the Chancellor announced that the government would undertake a review of the UK’s funds regime during 2020, which would cover direct and indirect tax, as well as relevant areas of regulation, with a view to considering the case for policy changes. There have been two broad areas of consultation by HM Treasury since then, the tax treatment of asset holding companies in alternative fund structures, which started immediately from March 2020 and a broader review of the UK funds regime which was launched in a “call for input” at the end of January this year. Both consultations have particular relevance for real estate investment management.

The review began with a consultation published with the 2020 Budget that ran until the end of May last year. This was intended to give the government a better understanding of the potential economic benefits to the UK of establishing a regime for asset holding companies (AHCs) comparable to other countries and the current UK tax barriers to this. This received widespread industry feedback with the particular concerns of the real estate industry reflected in responses from the Association of Real Estate Funds, British Property Federation, Investment Property Forum and others.

Following this, a second stage consultation ran from 15 December 2020 to 23 February 2021, with a view to draft legislation being published during 2021. This covered the main AHC proposals, plus some possible changes to the UK REIT regime, which have been expanded upon in the call for input discussed further below. In addition to the formal responses, HMT and HMRC conducted a large number of online meetings for detailed discussions with industry bodies who had responded to the earlier consultation. We now have to wait for further comment from HMT, but the concern widely shared by industry bodies is that the final proposals, when they emerge, will be too complicated and will thus be uncompetitive with other jurisdictions, in particular Luxembourg.

HM Treasury published the call for input for its review of the UK funds regime on 26 January. It runs until 20 April.

It sets out that “the overarching objective of the review is to identify options which will make the UK a more attractive location to set up, manage and administer funds, and which will support a wider range of more efficient investments better suited to investors’ needs”. The proposals are divided into three areas:

• the UK's approach to funds taxation;
• the UK's approach to funds regulation; and
• opportunities for wider reform.

The chapter on taxation covers a number of areas:

• A review of recent funds tax reforms and a request for feedback as to how effective they were in achieving their aims;
• Some possible reforms to the taxation of funds, none of which are particularly relevant to real estate funds;
• Tax changes for REITs. The review refers to the broader possible changes to the REIT regime already flagged in the AHC review, including considering relaxation of the listing requirement, changes to how the close company test is applied, the application of the holders of excessive rights rules and how the ’balance of business’ test operates. The review also outlines some possible, more technical changes to the REIT tax rules which are set out in detail in the call for input.
• Changes to the VAT treatment of fund management fees. This had been flagged in the Budget announcements last year and may be the subject of a future, specific consultation;
• A request for feedback on features of the UK’s double tax treaty network that might be enhanced for the benefit of funds;
• The treatment of AHCs. The review flags up the separate consultation discussed above.
• The treatment of limited partnership funds (LP Funds). The paper asks what are the barriers to the use of UK-domiciled LP Funds and Private Fund Limited Partnerships (PFLPs)?

The chapter on regulation is mainly review of ongoing regulatory reform and flags a number of recent and ongoing areas of work relevant to real estate funds, particularly those open to retail investors.

The final chapter on opportunities for wider reform is the most interesting, particularly the parts relating to potential new fund vehicles. This covers two areas:

• Following proposals from the Investment Association, the UK Funds Regime Working Group report set out recommendations to establish a Long-Term Asset Fund (LTAF). It is intended to facilitate long term investment in illiquid assets by defined contribution (DC) pension schemes, although it is hoped that it will be open to at least certain classes of retail investor. The LTAF is unlikely to be the first choice for a fund investing directly in property, where the more specialist Property Authorised Investment Fund (PAIF) will still have the advantage, but it does potentially open up more opportunities for indirect investment.
• The development of a new fund structure which the review notes that the Alternative Investment Management Association have proposed could be structured as either a corporate or as a ’partnership’ and which the Association of Real Estate Funds, supported by the UK Funds Regime Working Group, has also suggested could be structured as a contractual scheme (the Professional Investor Fund or PIF). Both proposals are supported by the UK Funds Regime Working Group. We do not think that these are mutually exclusive, and we can see benefits of having UK equivalents of both the Luxembourg SICAV and FCP. This is probably the most important piece of the consultation as it potentially addresses a major gap in the UK regime for real estate funds, providing an onshore equivalent of the offshore property unit trust.

The paper covers some other interesting thoughts:

• Because fund administrators can be, and in many cases already are, based outside London, growing the asset management industry can become part of the "levelling-up” agenda;
• Potential changes to rules for authorised funds (and presumably others that follow the IMA SORP) to make distributions out of capital;
• Possible changes to the rules for investment trusts.

The review ends with the invitingly open question, "are there other things government should consider as part of this review of the UK funds regime, or proposals for enhancements to the UK funds regime which the government has not included in this call for input? If so, how important are they and how would you like to see them prioritised in relation to the proposals explored in this call for input?"

If we want the changes to happen, in particular the introduction of the LTAF and PIF funds, it is important that as many organisations as possible respond to the consultation. It is not necessary to reply to every question.

John Forbes is an independent consultant advising real estate investment managers, investors and others in the real estate industry on the structure and operation of real estate funds. Hear from John when he joins a webinar panel to discuss how the seismic changes to the high street impacts the property sector. Taking place on 21 April, book on today!