Investment funds – changes in the Budget

Pat Dugdale

A few interesting tax changes announced today across the funds spectrum:

UK authorised funds

The 0.5% stamp duty reserve charge on dealings in units in UK unit trusts and OEICs will be abolished from 1st April 2014,  a very welcome change.

The Government will consult on a proposal to remove the requirement to withhold tax from interest distributions on UK bond funds when sold via reputable intermediaries and marketed solely to non-UK resident investors.

There was confirmation that the Government remains committed to the early introduction of authorised contractual funds (tax transparent funds) and intends to introduce regulations shortly.

Investment trust companies

The conditions for investment trust status were revamped in 2011 with the introduction of a new  Condition A requiring that “the business of the company consists of investing its funds in shares, land or other assets with the aim of spreading investment risk … “. There was concern that even a very small amount of other activity might cause loss of an investment trust’s capital gains exemption. The amendment will make it clear that it will be sufficient for “substantially all” of the business to satisfy this requirement, so ancillary activities will not prevent Condition A from being satisfied. This will apply retrospectively to accounting periods commencing on or after 1st January 2012.

Generally an investment trust must not retain more than 15% of its income, subject to certain exceptions. A new exception will be introduced, probably with effect from June 2013, relaxing the distribution requirement where an investment trust has accumulated realised revenue losses in excess of its income for an accounting period with the result that a requirement to make a distribution would result in a distribution from capital, which investment trusts are not permitted to make.

Offshore funds

An anti-avoidance provision will take effect from today to put beyond doubt that, where the profit on disposal of an interest in a fund would be taxed as income under the offshore funds regime, then that charge cannot be avoided by any merger or reorganisation of the fund.

In addition there will be consultation on proposed technical changes, including corrections to a technical mismatch between the rules for calculating total reported income and the amount reported to individual investors. Also, where a fund operates full equalisation and treats part of an investor’s first distribution as return of part of his capital cost, then the capital returned can be set off against the first distribution made for reporting of income too.

UK investment managers

The Government is keen to promote the UK as a centre of fund management and will consult on changes to support this. As a general rule, a company which has its central management and control in the UK is resident in the UK for tax purposes. However the UK will not treat a UK managed fund as resident in the UK if it is a body corporate authorised under the UCITS Directive in another EU member state and resident there for tax purposes. The Government will consult on proposals to extend this treatment to certain non-UCITS funds. We do not yet know the scope of this extension but it sounds interesting.

A non-UK company is liable to UK corporation tax on the profits of any trade which it conducts in the UK through a UK permanent establishment. This can apply to a trade in shares and securities but a special investment managers’ exemption permits foreign funds to carry out transactions in shares and securities through UK based investment managers without bringing their funds into charge to UK tax provided certain conditions are satisfied. The Government will consult on minor changes to the “white list” of permitted investment transactions for this investment managers’ exemption.


It is also stated that the Government will make changes to limited partnerships “to more effectively accommodate their use for private equity investment”. Limited partnerships have long been the preferred vehicle for private equity investment by institutional investors, but it is understood that the Government intends to consult on the possibility that partnerships should be able to elect to have separate legal personality to facilitate registration of their investments and, in particular, use of English limited partnerships as vehicles for secondaries funds and funds of funds.

The proposed anti-avoidance provisions for partnerships and LLPs will also be relevant to funds and fund managers seeking to mitigate NICs by making employees LLP members or to reduce tax on profits by use of a corporate partner. See our earlier blogs for more detail.

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