In June 2013 the UK Government introduced new regulated tax-transparent fund vehicles. The aim is to place the UK in a more competitive position within the investment services industry.
The introduction of Tax Transparent Funds (TTFs) meets the requirements of the new EU 'Undertakings for Collective Investment in Transferrable Securities' (UCITS IV) Directive. Reducing the cost and complexity of international investments and removing tax obstacles should reinforce the position of the UK as a leading asset management centre in Europe. These new fund vehicles are expected to be attractive for UCITS master funds that pool investments under cross-border arrangements and institutional investors. There should be benefits from economies of scale, reduced costs and potentially enhanced returns through greater scope for diversifying investments. By being fiscally transparent (there is no income tax, corporation tax or capital gains tax within the fund) the scheme should offer investors tax efficiency too.
The new system introduces two alternative tax transparent fund structures, which are collectively called 'authorised contractual schemes'.
1. The first structure is an authorised co-ownership scheme (ACS) where investors co-own the scheme property. The ACS will be transparent for income tax purposes but opaque for capital gains tax purposes, in other words investors will be taxed on the income received by the fund whereas capital gains would be assessed when units in the ACS are transferred. Individuals investing in a co-ownership scheme will therefore not be treated as owning a share of the underlying assets, but will instead own an interest in the scheme and be subject to capital gains tax on disposal of that interest. The ACS is intended to be suitable worldwide; however it is ultimately up to the local tax authorities to determine the tax treatment of these schemes in other jurisdictions.
2. The second type of structure is an authorised limited partnership (ALP). ALPs, like other limited partnerships, will be transparent for both income tax and capital gains tax purposes and therefore the investors in an ALP will be subject to income tax and capital gains tax on the income and gains of the ALP.
Regulations have been introduced so that the management of an authorised contractual scheme is VAT exempt. Transfers of securities to these schemes should also be exempt from stamp duty and stamp duty reserve tax.
In summary, these new types of structures appear to have potentially positive benefits to both investors and the fund operators themselves - it will be interesting to see how popular TTFs are in the market and investors' appetite for them.
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