The Chancellor delivered his 2013 UK Budget yesterday. A few items were announced that are of interest to the international fund and asset management industry, and this note summarises those proposals.

Limited Partnerships

The Government will consult with a view toward making technical changes to the Limited Partnerships Act 1907 as it applies to funds, including the possibility of allowing UK limited partnerships (“LPs”) to elect for legal personality. This has long been a concern to private equity and venture capital groups. If such a change were introduced, it would increase the attractiveness of the UK as a jurisdiction in which to base a fund, and possibly also to base fund feeder vehicles, such as carried interest special limited partnerships.

At present, English LPs do not have legal personality, so they cannot, for example, be a partner in another partnership in their own name. In addition, it is becoming increasingly important to certain foreign investors to have access to a fund vehicle that is tax transparent and that possesses legal personality. Scottish LPs do have legal personality, and are widely used for both these purposes.

If the concept of elective legal personality is introduced, it is assumed, although not certain, that this will apply to all UK LPs (English and Scottish) and will thus provide much greater flexibility. It is not clear yet whether the scope of the consultation will extend to partnerships that are not used as main fund vehicles, such as feeder funds and carry vehicles, but we shall monitor the consultation.

This sort of change would make the UK competitive with Guernsey and Jersey, where an elective regime for legal personality of LPs has been in place for some time. The advantage for the UK, of course, is that it is a core EU jurisdiction, which may be more attractive to certain foreign investors.

Extension to White List

The Government will also consult on minor changes to the “white list” of transactions that are not generally treated as “trading” in nature when carried on by offshore funds. In particular, the changes will focus on transactions in traded life policy investments and certain forms of carbon credit.

UK Bond Funds

The government will develop proposals and consult with industry on a proposal to remove the obligation from UK “bond funds” to withhold 20% when paying interest to investors.

A UK bond fund is normally constituted as an authorised unit trust or OEIC (together known as authorised investment funds or “AIFs”), and will have more than 60% of its investments by reference to market value in "qualifying investments." "Qualifying investments" include money earning interest, other debt and bond investments and certain other non-equity investments. Payments of interest by a UK AIF bond fund are currently subject to 20% withholding tax. If this change is adopted, it will only apply where the fund is sold via reputable intermediaries and marketed only to non-UK investors.

Fund Residence

At present, there is a UK tax rule (s.363A TIOPA 2010) that ensures that foreign UCITSs funds, authorised in another EU Member State, will remain treated as non-UK tax resident, even if, for example, they are managed in the UK. The Government announced in the Budget that it will consult on widening this rule to apply to non-UCITs foreign domiciled funds. This will be of particular comfort to managers who are considering operating offshore funds in the UK under the AIFM Directive.

SDRT

Currently, there is a charge to stamp duty reserve tax when units in a UK unit trust scheme are surrendered – the 0.5% cost is borne by investors. This is commonly known as the “Schedule 19” charge. Significant compliance burdens are also involved for unit trust managers under Schedule 19. In order to make UK unit trust funds more competitive, this charge will be abolished with effect from tax year 2014/15.