Budget 2014: overview from a funds perspective

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Summary: This briefing summarises the key announcements in the Budget from a funds perspective. It also contains some general tax updates which will be of interest to those in the funds industry.

This briefing summarises the key announcements in the Budget from a funds perspective: including confirmation on the changes to the tax treatment of LLPs and partnerships that take effect from 6 April this year, a consultation on the SDLT treatment of seeding property to authorised investment funds and the changes to taxation of high value residential property. It also contains some general tax updates which will be of interest to those in the funds industry.

Partnerships

Despite mounting pressure for them to be deferred, the anti-avoidance rules treating certain members of LLPs as employees for tax purposes will have effect from April this year. This is also the case for the rules applying to partnerships with a mixture of individual and non-individual partners, which will reallocate the partnership profits or losses to produce a higher tax charge for individual partners.

These are leading to a rethink of the status quo and to restructuring, where appropriate.

Real Estate Funds

A consultation has finally been announced on a potential seeding relief for transfers of assets to a Property Authorised Investment Fund (PAIF) and on the potential SDLT treatment of the new authorised contractual fund (ACS). Though slow in coming, this must be good news for the industry, which (in the case of the PAIF) has been lobbying HMRC and HM Treasury for this for almost two years. Life companies, in particular, are keen to be able to transfer assets into the new vehicles. It is hoped that the timing of the consultation process will be such that the relief would be able to be drafted in time for the Budget next year – if not before. A string of transactions is waiting in the side lines for such a relief, without which SDLT of 4% may be payable.

The ACS was, of course, not originally designed for real estate, but the structure is such that, subject to resolving the SDLT, it would be very suitable for it. There is an appetite amongst managers to use this for real estate as well as for other assets, making use of the umbrella structure and achieving potential cost efficiencies in a UK vehicle.

Residential

Rather unexpectedly, the Chancellor extended the application of the annual tax on enveloped dwellings (ATED) and the related Capital Gains Tax (CGT) charge, so that they will apply from April 2015 to properties worth over £1m and from April 2016 to properties worth over £500,000. In addition, with effect from 20 March, the punitive 15% SDLT rate on UK dwellings purchased by companies, partnerships (with a corporate member) or collective investment schemes, whether onshore or offshore, will apply to acquisitions of homes worth more than £500,000. The existing reliefs, for example, for commercially let properties, will apply.

Going forward, those with such properties should review their documents and also, as a compliance measure, ensure that they make the necessary annual claims.

Rather frustratingly, there has not been any news - other than the announcement of a consultation - on the proposal, with effect from 2015, to extend the CGT charge on residential property held by non- UK residents generally. It is hoped (and expected) that the exclusions for the existing CGT measure on higher value property would simply be incorporated, to ensure that funds holding properties in this way will not prejudiced.

UK competitiveness drive continues to help UK funds

As anticipated, the Budget announcements have confirmed that interest paid by UK domiciled bond funds can be paid gross by UK authorised funds to non-UK resident investors, where relevant securities are marketed to them and not to investors in the UK. This is a very helpful practical measure, which the industry has campaigned for, putting the UK on a level footing with other jurisdictions.

Schedule 19 SDRT/ stamp duty/ SDRT

Confirmation was given that legislation would be included in the Finance Bill to abolish the Schedule 19 0.5% charge on redemptions in UK OEICs and unit trusts from the end of this month. It is likely that, once in place, we will see some more PAIFs come on-stream, as it will simplify the conversion process and ongoing compliance. This is a good move, putting UK funds on a more level footing to funds in those other jurisdictions which do not have effective transfer taxes. An exclusion from the exemption (confirmed in December) has now been introduced for in-specie redemptions.

Though nothing was expressly mentioned in the Budget, it is expected, similarly, that stamp duty and SDRT will also be abolished for exchange traded funds (ETFs) from the end of April.

REITs

The Budget confirmed the announcement in the Autumn Statement that the “institutional investor” rule – enabling a REIT to be held by a small number of institutional investors without it becoming “close” – would be extended both to UK REITs and to non-UK REITs, which are treated as UK REIT equivalents in their own jurisdiction.

The draft legislation does not, however, as yet give any clue as to what this definition of non-UK REIT might mean. There is currently a definition of non-UK REIT equivalent in the PAIF rules, but it seems that this is not to be useful as a reference point, as this is to be conformed to the new REIT definition. The industry has asked for clarification as to what is meant precisely and what evidence will need to be provided to satisfy the other investors and the UK REIT that the non-UK REIT is a qualifying one. We will have to wait to see.

Good news for savers, but possibly less so for insurers: competition for retail money to hot up

The Budget announcements have been good news for savers, introducing a new and more flexible ISA (NISA) from this July, where the total amount that can be invested is increased to one pool of £15,000. The news does not stop there, however, as the proposals increase the range of eligible investments – most notably by proposing the abolition of the 5 year maturity restriction, which will enable them to invest in items such as retail bonds. It is also proposed that new types of product, such as financing through peer to peer lending be included. A consultation will be introduced to consider this.

This is, of course, on top of the recent revision to the rules to allow shares in AIM and certain other companies to be eligible assets as well as those on the main list, so offering investors a wider investment choice.

On the other hand, the proposed abolition of the requirement for a proportion of a defined contribution pension to be invested in an annuity will, however, have repercussions for the insurance industry as well as for savers. While for the investor this will potentially free up more capital that it can invest as it wishes, for insurers, this could mean – and certainly the Chancellor expects that it will – that less money will be invested in annuities. Already this has had an impact on the value of insurers’ shares in the stock market.

Some other tax updates which will be of interest to those in the funds industry.

Exempt unauthorised unit trusts

With effect from April 2014, the new regime for exempt unauthorised unit trusts (EUUTs) comes into force. This continues to be an interesting structure for appropriate investors, being those who are exempt from tax on capital gains other than by residence, such as charities and pension funds. Indeed, the EUUT is much improved under the new rules – not least in the ability to pay distributions without the current withholding of 20%, avoiding the existing need for a reclaim, where appropriate.

Under the new rules, to retain EUUT status, the fund has however now to comply with various new upfront and ongoing compliance rules and, in particular, has now to apply for approval from HMRC before the end of the first relevant accounting period.

Those funds that do not satisfy the requirements will be treated as if a UK company for tax purposes, effectively losing the CGT exemption and causing income in the fund to be taxed.

Regulations have been published, with effect from 6 April, to remove any doubt as to which types of collective investment schemes are not caught by the regulations. These should not, however, contain any surprises.

UK Management of Offshore Funds

Just by way of update, in line with the AIFMD developments, section 363A TIOPA has been amended to ensure that the use of an onshore manager under the AIFMD regime will not automatically mean that the fund is treated as UK tax resident. This follows the same lines as the rules for UCITS funds, which are already in force.

The legislation includes a couple of exceptions such as for UK authorised unit trusts and UK companies. It is expected that UK REITs are to be added to the list also, to ensure that those established elsewhere do not inadvertently fail one of the main REIT requirements – i.e. that the principal company is UK resident only.

There has been some discussion about what the definition of offshore fund should be for the purpose of the rules. There was concern that limiting it to “offshore funds” within the meaning of the offshore funds regulations, as was the case originally, was too narrow. This has now been amended to include an alternative investment fund resident in another state and treated as a resident there for tax purposes. It seems that this may not actually encompass all offshore entities, such as those that are located in a jurisdiction with an exemption regime. Cayman springs to mind.

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