UK Spring Budget 2021 – Investment Funds
After months of speculation about a potential rise in the rate of capital gains tax, including the 28% carried interest rate, fund managers will have breathed a sigh of relief after hearing the Budget announcement on 3 March – at least until April 2022.
No increase in capital gains tax rate
The current rates of capital gains tax, including the 28% rate for carried interest, will remain unchanged until at least April 2022. The current annual exempt allowance for capital gains tax (GBP12,300 for individuals) will be maintained until 6 April 2026. However, in light of a report by the Office of Tax Simplification in November last year, which considered raising the rate of capital gains tax, we cannot rule out the government consulting on making changes to the capital gains tax rate for future tax years, as well as fundamental changes to the structure of the tax.
Increase in UK corporation tax rate
From April 2023, the rate of UK corporation tax will rise to 25% on profits over GBP250,000. Businesses with profits under GBP50,000 will remain at the current 19% rate, and there will be relief for businesses with profits under GBP250,000 so that they pay less than the main 25% rate. Although 25% is a big increase (long gone are the days when the expected rate was 17%), we still expect the UK’s rate to be very competitive, because many jurisdictions have a higher rate, and in addition, many jurisdictions are likely to increase their corporation tax rates as a result of COVID-19 related government spending.
VAT and other taxes
The government will continue to honour the Tory “triple tax lock” pledge not to raise the rate of VAT (standard rate at 20%), income tax and national insurance.
Hybrid mismatch rules
The hybrid mismatch rules, introduced in 2017, are aimed at counteracting tax mismatches where the same item of expenditure is deductible in more than one jurisdiction or where expenditure is deductible but the corresponding income is not fully taxable. In response to a consultation last year, the government has announced a number of legislative amendments to the hybrid rules. A long anticipated change, is that a counteraction will be excluded where the recipient is a “Qualifying Institutional Investor” broadly, and as defined, this includes pension schemes, life assurance businesses, sovereign wealth funds, charities and certain investment entities. Other points of interest include diluting the “acting together” test that could inadvertently bring third party lenders within the rules and excluding from a counteraction payments to and from entities taxed as securitisation vehicles.
Repeal of provisions relating to the Interest and Royalties Directive
From 1 June 2021, UK domestic legislation that had incorporated the EU Interest and Royalties Directive will be repealed. In practice, this means that UK resident companies making payments of annual interest to connected companies resident in an EU member state, that have until now relied on the UK legislation incorporating the EU Interest and Royalties Directive, will now need to consider the terms of, and (as applicable) ensure that applications are made under, a relevant double tax treaty in order to pay interest gross or to claim a refund on tax withheld. The UK’s double tax treaty network is extensive and favourable, and we are not expecting this change to have a significant impact. Nevertheless, the position on cross border payments of interest should be checked to ensure that treaty claims are made in time.
Consultations on tax treatment of UK Funds
Although not directly addressed in the Budget, the government has just concluded a second stage consultation on Tax Treatment of Asset Holding Companies in Alternative Fund Structures. In this consultation, HM Treasury sets out proposals for a wide-reaching, bespoke tax regime for UK asset holding companies held within investment fund structures. HM Treasury has confirmed that draft legislation will be published during the course of 2021, allowing for a period of technical consultation ahead of its inclusion in the Finance Bill. HM Treasury has separately published a call for input on a Review of the UK Funds Regime, which closes on 20 April 2021, and which includes consideration of introducing a broad VAT exemption for fund management services.
Should you have any queries on the issues raised in this summary, please reach out to your usual UK tax contact or one of the contacts below.
