On 26th January 2021, the UK Government announced that it is seeking input on issues across both tax and regulation as part of its review of the UK funds regime. The call for input closes on 20 April 2021.

Objectives

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.

When considering proposals, the government is clear that any tax reforms will be compatible with its robust approach on avoidance and evasion, and with the UK’s international commitments. They will also ensure the UK can effectively exercise taxing rights over UK source income. Similarly, any changes to regulation will support the UK’s commitment to upholding the highest standards of regulation and appropriate supervisory oversight and investor protection. The government recognises that the UK’s robust regulatory regime and its commitment to upholding these standards are key strengths across financial services, including funds.

The following chapters seek stakeholder input on possible changes to the UK funds regime, to inform the government’s overall approach:

  • Chapter 2: The UK’s approach to funds taxation
  • Chapter 3: The UK’s approach to funds regulation
  • Chapter 4: Opportunities for wider reform

Chapter 2: The UK’s approach to funds taxation

  1. This call for input on the UK funds regime is necessarily wide-ranging. As the government would not be able to take forward all proposals immediately, what do you think the top 3 priority proposals should be for government implementation and why?
  2. How effective were recent reforms to UK funds taxation in achieving their aims? Please explain your answer. Could anything have made these reforms more effective, particularly in terms of increasing the attractiveness of the UK as a location to set up funds?
  3. Why has uptake of TEFs been limited? Please explain any operational or commercial factors that have influenced their uptake. How could these be addressed?
  4. How would the proposals in paragraph 2.9 improve tax efficiency of multi-asset authorised funds? Please explain how the proposals would work in practice and how a proportionate impact on HMRC could be ensured.
  5. Are there are any additional changes the government could consider to reduce tax leakage in multi-asset/balanced authorised funds?
  6. Where funds are already tax neutral, how would a tax-exempt status for funds influence decisions about how and where to set up funds?
  7. How would tax-exempt funds affect the competitiveness and attractiveness of the UK funds regime? Please explain your answer providing evidence and international comparisons where possible.
  8. What would be the likely impact if changes were made to the REIT regime in the areas discussed in paragraph 2.16? To what extent could investment in the UK be expected to increase, and what would be the drivers for this? Could such changes be expected to impact the extent to which funds with UK and foreign property assets are managed in the UK?
  9. Are there any other reforms to the REIT regime that the government ought to consider, and why?
  10. Regarding the proposals covered in this call for input, are there any specific considerations that the government ought to take account of in the context of the UK’s double taxation treaty network? Please provide as much detail as possible.
  1. What are the barriers to the use of UK-domiciled LP Funds and PFLPs, and how might tax changes help to address them? Please provide detailed proposals and explain your answers.

Chapter 3: The UK’s approach to funds regulation

  1. What benefit does fund authorisation bring to product providers beyond access to retail investors? Does this benefit vary depending on the specific investor base or investment strategy? What relevance does authorisation of a product have to its appeal to the UK market and to the international market?
  2. Do you have views on the current authorisation processes set out in legislation and how they could be improved?
  3. How do the FCA’s timescales for fund authorisation compare internationally? Is there value in providing greater certainty about these timescales? Other than by reducing the statutory time limit, how could this be achieved and what benefits would it bring?
  4. What would you like the QIS structure to enable you to do that is not currently possible? What are the existing impediments to your suggested strategies, and why would the QIS be the preferred UK structure for those strategies?
  5. Do you think that the range of QIS permitted investments should be expanded? If so, in what way should it be expanded, what impact would this have, and would it still be appropriate for sophisticated retail investors?
  6. Do you think that the QIS borrowing cap should be raised or QIS constraints on derivatives exposure should be relaxed? If so, to what magnitude and why? Would this be appropriate for sophisticated retail investors?
  7. Do you agree that the QIS sub-fund structure could be improved? If so, how? Would greater clarity for the segregation of assets between sub-funds via legislation or rules be helpful? Please provide details.

Chapter 4: Opportunities for wider reform

  1. Do you agree that reforms to enhance the attractiveness of the UK funds regime should focus on appealing to the creation of entirely new funds that have not yet been set up?
  2. Why do firms choose to locate their funds in other jurisdictions in cases where the UK’s funds regime has a comparable offering, for example ETFs? Are there steps which could help to address this following the potential reforms to the UK funds regime discussed in this call for input, and would the scope to address this vary depending on the type of fund or target investor market?
  3. Do you agree that reforms to enhance the attractiveness of the UK funds regime should focus on appealing to AIFs targeting international markets? Which markets would be most valuable and what would be the key obstacles to overcome in each?
  4. Do you agree that new UK fund administration jobs associated with new UK funds would be likely to locate outside London? How could the government encourage fund administration providers to locate jobs in specific UK regions?
  5. How can the government ensure the UK offers the right expertise for fund administration activity?
  6. Are there specific barriers to the use of ITCs, either from the perspective of firms creating fund products or from the perspective of investors seeking to access them? Are there specific steps which could address these?
  7. Should asset managers be required to justify their use of either closed-ended or open-ended structures? How effective might this requirement be, and what are the advantages or disadvantages of this approach?
  8. Should the distribution out of capital be permitted? What types of products would this facilitate and what investment or financial planning objectives would they meet for investors? What are the possible advantages, disadvantages and risks for investors?
  9. How do you consider that such a change might be delivered? Please explain your answer, providing specific examples of rules, how they could be changed, and the effect of the changes.
  10. Do you foresee any issues with the LTAF adopting the current tax rules for authorised investment funds? Would the nature of an LTAF’s investments, and the tax treatment of the income it receives in respect of those investments, mean that the current rules for authorised funds lead to tax inefficient outcomes?
  11. Are there any other tax considerations, outside of those that follow from the adoption of the current tax rules for authorised funds, that will be important to the success of the LTAF? Please explain your answer.
  12. How would each of the proposed unauthorised fund structures add value alongside existing authorised and unauthorised UK fund structures, including the QIS? Would they bring value alongside each other? Would they bring unnecessary complexity? What would each structure allow fund managers and investors to do that they are unable to do currently in the UK regime? Please address each proposed unauthorised structure separately, and indicate which of the proposed unauthorised structures you consider most important.
  13. Would these unauthorised structures support the government’s work on facilitating investment in long-term and productive assets, as outlined in Chapter 1?
  14. How do you think the government could best achieve consistent branding for UK fund structures which target only professional investors?
  15. Do you think that these unauthorised structures should be unregulated collective investment schemes? If you consider any ’light-touch’ authorisation necessary or desirable, what do you understand this term to mean and what form could it take? Why would it be beneficial for investors, and how could it be explained to them in a way that avoids confusion with the regulatory assurances of fully-authorised structures?

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