HM Treasury’s (second) consultation on taxation of alternative fund structures

As announced at last year’s Spring Budget, the government has been pursuing a review of the UK funds regime, from a tax perspective. HM Treasury (HMT) closed its second consultation on the proposals on 23 February 2021.

The government believes that “there is a strong case for change” in the taxation of UK asset holding companies (AHCs) held within Fund structures and HMT’s proposal is to have a bespoke tax regime for AHCs in Fund structures.

This proposal looks to be a potential game changer to the tax regime of AHCs, particularly when combined with the separate review of the scope of the VAT exemption for investment fund management services, and the government certainly hopes that creating a UK tax-friendly Funds regime would lure Fund managers back to the UK when setting up future Funds, away from other Fund-friendly destinations (such as Luxembourg in particular).

Some of the key proposals include a capital gains exemption in the hands of the AHC, limiting the AHC’s taxable profits to an amount commensurate to its role as an AHC, and switching off UK withholding tax on interest payments from the AHC.

However, as we set out below, a closer look shows that there are limitations to these proposals.