UK Will Reform Taxation of Asset Managers

The UK Treasury has proposed a sweeping reform of the taxation of asset managers in an effort to enhance competitiveness. The proposals would introduce a direct tax exemption regime for UK authorized investment funds, remove tax as a barrier to qualified investor schemes by replacing the substantial holding rule; and adapt the tax rules for investment trust companies to deliver tax efficient investment into interest bearing assets. A key goal of the initiative is to position the UK as a location in which to launch authorized investment funds for sophisticated and institutional investors.

Investors in qualified investment schemes are either institutional or sophisticated individual investors who can be expected to understand the risks involved in a wide range of investments. The substantial holding rule imposes a tax charge on certain investors if their units represent rights to 10 per cent or more of the net asset value qualified investment scheme. The mechanical nature of the rule has acted as a barrier to the development of these investment vehicles. Thus, the substantial holding rule will be replaced with a more flexible test aimed at removing tax as a barrier to these investment schemes and reducing compliance obligations for investors in them.

More specifically, the substantial holding test would be replaced with a genuine diversity of ownership rule designed to ensure that the tax advantages are only available where the investment is widely held. Under the proposed genuine diversity of ownership rule, qualified investor schemes must make investment units widely available and specify the intended categories of investor. Also, they must not limit investors to a limited number of specific persons or specific groups of connected persons. Further, they must widely market the investment to reach the intended categories of investors.