United Kingdom

Sector Insight: Investment Management 

KPMG Budget 2013

Investment Management Strategy

After a short burst of intense consultation, the Treasury has launched its Investment Management Strategy (PDF 241 KB), a very strong statement of intent to preserve and enhance the UK’s position as a leading global investment management centre. The paper focuses on taxation, regulation and marketing and sets out a principled approach for the future.

Many of the announcements are centred on funds, a part of the value chain where the UK loses out to more nimble EU competitors. By improving the tax treatment and reducing the regulatory burden it is hoped that the UK’s share of funds will increase and this in turn will help strengthen the overall investment management sector.

Taxation measures will be considered in detail below; the headline regulatory and marketing measures include:


  • Responsiveness to industry needs and constructive engagement on new legislation;
  • A new co-ordinated approach and ongoing industry engagement;
  • A ‘one-stop shop’ for new managers including a ‘concierge’ service;
  • A sustained overseas marketing campaign;
  • An Islamic Finance task-force.

The paper also provides good news for alternative fund managers. The commitment to take a sensible approach on implementation of the Alternative Investment Fund Managers Directive and tax certainty comes at a good time. Technical changes will also be made to the Limited Partnership Act of 1907 to allow partnerships to elect for legal personality (although the VAT treatment needs careful consideration). The paper’s estimate of the level of funds about to come onshore could be optimistic but the important point is that the Treasury is acting now before on-shoring trends are known, not when it’s too late. There is a note of caution for managers who are members of a Limited Liability Partnership; it is hoped that the anti-avoidance measures described below are carefully targeted so as not to have an unintended impact on UK asset managers.     

In the short term, such developments will mean that the UK makes more short lists when managers look where to locate funds. The longer term challenge is selling the UK as a funds centre – if the UK is to make a breakthrough into new markets, the Treasury’s ideas in this area, involving the TheCityUK, IMA, AIMA and UKTI, will need to work and this will require sustained effort as the traditional fund centres have a clear head start.

As well as referencing ongoing matters for example the new Tax Transparent Fund regimes, the new Unauthorised Unit Trust regime and VAT treatment of portfolio management in light of the Deutsche Bank judgement the following new tax measures were announced:

Abolition of Schedule 19 Stamp Duty Reserve Tax

Abolition of Schedule 19 SDRT with effect from 1 April 2014 is a major headline grabber and signals that the Treasury is committed to enhancing the marketability of funds (the measure costs funds very little tax but can cast a shadow over UK funds). The step was a natural progression after exclusion of the new contractual schemes from Schedule 19 (subject to meeting anti-avoidance legislation which may be extended to now cover all UK funds). The announcement comes as the European funds industry is trying to model the impact of the proposed EU financial transaction tax – it is hoped that the UK’s move will encourage European counterparts to consider suitable exemptions.

KPMG welcomes this development having assisted the IMA with its lobbying efforts with our two reports Taxation and the Competitiveness of UK Funds and The Value to the UK Economy of UK-Domiciled Authorised Investment Funds. Given that the measure costs £145 million per annum it seems that the Government has accepted the argument that the package of changes will lead to more UK business than otherwise and therefore more income from employment, corporation and indirect tax receipts.

Management of non-UCITS funds

The Government has announced that it will consult on proposals to widen the application of section 363A Taxation (International and other Provisions) Act 2010 (TIOPA 2010) that allow UK managers to manage non-UK funds without the risk that the funds will become UK tax resident.  The legislation currently only protects UCITS, but a consultation will be undertaken to extend this protection to certain non-UCITS. This is with the Alternative Investment Fund Managers Directive in mind but it remains to be seen if all funds will be protected given the wide variety of non-UCITS products that are available.

Gross distributions of bond funds

A consultation will be undertaken to permit UK bond fund managers to pay gross distributions to non-UK investors where the funds “are marketed to foreign investors in a manner that does not give rise to a risk of evasion”.  This is again welcome news because it assists those managers selling UK bond funds overseas who are currently finding the reputable intermediary condition difficult to apply in practice.

Providing greater certainty whether fund transactions will be deemed to be trading or investing

The white list of transactions currently provides certainty for UK and offshore funds that such funds that invest in assets on this list will not deem the fund to be trading for UK tax purposes. This certainty provides for a number of regimes including:

  • UK funds are not taxed on capital gains;
  • Offshore funds do not have a permanent establishment in the UK;
  • Offshore reporting funds do not need to report capital return as income to UK investors.

The Government has announced an extension of the white list transactions to include traded life policy investments and certain forms of carbon credits.

Offshore funds regime

With effect from 3pm on 20 March 2013, the Offshore Funds (Tax) Regulations 2009 (SI 2009/3001) this has happened to ensure that where a disposal of an interest in a non-reporting offshore fund would give rise to an offshore gain this cannot be avoided by any merger or reorganisation of the fund.

Other changes to the offshore funds regime include:

  • Changing a technical mismatch between the rules for calculating total reported income and the amount reported to investors;
  • Amending the rules for funds operating ‘full equalisation’ to permit capital returned to be set off against the first distribution made;
  • Allowing excess expenses of one computation period to be offset against another computation period provided they are within the same overall reporting period.


Investment Trust Company amendment

Two changes will be made to the revised Investment Trust Company (ITC) tax regime that applies in respect of accounting periods that commence on or after 1 January 2012.

Condition A (contained in section 1158(2) of CTA 2010) will be amended to clarify that the condition will be satisfied provided that all, or substantially all, of the business of the company is to invest its funds in shares, land or other assets with the aim of spreading investment risk.  Therefore, the existence of some ancillary activities will not result in a breach of condition A provided those activities are not substantial. The amendment will have retrospective effect so that it applies for all accounting periods that commence on or after 1 January 2012.

The ITC tax regulations will be revised to provide an additional exception to the income distribution requirement. The amendment will result in there being no requirement for an ITC to pay a distribution from capital in the scenario where an ITC has accumulated realised revenue losses in excess of its income for an accounting period. This change is anticipated to take effect for accounting periods commencing on or after 1 July 2013 subject to a consultation process.

Both changes have a positive impact on the existing ITC tax regime.

Partnership Consultation

The Government has also announced that a consultation paper will be issued in the Spring with regards to the use of partnerships to:


  • Remove the presumption of self-employment for limited liability partnership (LLP) partners, to tackle the disguising of employment relationships through LLPs;
  • Counter the manipulation of profit/loss allocations (by both LLPs and other partnerships) to secure tax advantages.


As above it is hoped that these anti-avoidance measures are carefully targeted so as not to have an unintended impact on UK asset managers.  It is noteworthy that the anticipated tax take from these measures exceeds the cost of Schedule 19 abolition.

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