There are a number of 2016 tax changes that will be of interest for funds and managers:
- The basic rate of capital gains tax is reduced from 18% to 10%, and the 28% rate to 20%, on most gains made by individuals, trustees and personal representatives, including gains qualifying for entrepreneurs' relief or the new investors' relief.
- Entrepreneurs’ relief has been extended to non-employee investors who dispose of unquoted shares held for more than three years.
- Some or all of a fund manager’s performance-related return will be taxed as income, rather than capital gains, where the investment period is less than 40 months.
- From 2017, interest can be paid by bond funds without deduction of income tax.
- Proposals have been announced to charge profits of offshore property developers to UK tax.
- A relief from stamp duty land tax will be introduced for initially seeding a property authorised investment fund or co-ownership authorised contractual scheme with land located in England or Wales.
Entrepreneurs Relief and Investors’ Relief
A new “investors’ relief” has been introduced which will extend entrepreneurs’ relief (ER) to the disposal of shares held by investors in private companies. Where the relief applies, the rate of CGT charged on the gain will be 10%, with the total amount of gains eligible for investors’ relief subject to a lifetime cap of £10 million per individual. The lifetime cap for investors’ relief is separate from that for ER; gains on which an individual has claimed or will claim ER will not be taken into account for the investors’ relief lifetime cap.
In order to qualify for the investors’ relief, a share must:
- be newly issued and ordinary, having been acquired on subscription for new consideration;
- be in an unlisted trading company, or unlisted holding company of trading group; and
- have been issued by the company on or after 17 March 2016 and at the time of its disposal must have been held continuously for a period of at least three years from 6 April 2016.
It is also a requirement that the investor (or a person connected to him) is not an officer or employee of the relevant trading company (or of a connected company).
From 6 April 2016, managers’ performance related returns are treated as chargeable in whole or in part to income tax, unless the average holding period of investments by reference to which those payments are calculated is more than 40 months, in which case capital treatment continues to apply. Where the average holding period of investments is between 36 and 40 months, the portion of the return chargeable to income tax is gradually tapered off, while a period of less than 36 months triggers income treatment.
Where there are multiple rounds of investment in a company, a fund may in certain cases treat further rounds of investment as having been made at the time of the initial investment.
A fund manager may also treat carried interest payments as “conditionally exempt” from the charge to income tax where it can be assumed the carried interest would not be chargeable to income tax, because the investment is likely to be held for a period long enough to qualify for the more favourable capital treatment.
The decrease in capital gains tax (CGT) rates announced at Budget 2016 will not apply to carried interest, so the rate at which carry is charged to CGT will continue to be 28% for higher rate taxpayers.
Savings Income Tax
From 6 April 2017 interest from open-ended investment companies, authorised unit trusts, investment trust companies and on peer to peer loans may be paid without deduction of income tax. This change was previously announced and will mean a lesser administrative burden for fund managers.
Offshore Property Developers
Provisions to charge to UK tax non-UK residents on profits arising from trading in UK land (whether or not there is a relevant permanent establishment of the non-resident) will also be introduced in the Finance Act 2016, although the legislation will be not be exposed until the Bill reaches report stage in Parliament. This is likely to constitute a significant impact for offshore property developers.
Corporate Interest Relief
From 1 April 2017 a fixed ratio rule is proposed to cap the amount of relief from corporation tax available for net interest expense to 30% of a group’s UK earnings before interest, tax, depreciation and amortisation (EBITDA). Provisions will also be included for a group ratio rule based on the net interest to EBITDA ratio of the worldwide group. The rules include a de minimis threshold of £2 million net UK interest expense and provisions which carve out certain types of public benefit infrastructure investments, which typically use highly leveraged structures.
The government announced in Budget 2016 that it will launch a consultation on partnerships taxation. This consultation will include a number of areas where the taxation of partnerships could be seen as uncertain, including how partnerships calculate their tax liability.
The government has also announced that it intends to pass a number of amendments to the Limited Partnerships Act 1907 which will make UK limited partnerships more competitive for use as alternative investment funds (AIFs). The responses to the initial consultation passed last year were published in March 2016, and the draft legislation will follow soon.
VAT Treatment of the Management of AIFs
Last year the European Court of Justice issued a landmark decision stating that the management of real estate funds and certain non-UCITS funds are VAT exempt. For further information, please see this Law Now on the decision.
ACS and PAIF Seeding Relief introduced
A new relief from paying stamp duty land tax (SDLT) on the “seeding” of co-ownership authorised contractual schemes (ACS) and property authorised investment funds (PAIF) will apply once the Finance Act 2016 is given royal assent (around July 2016). The effect of that relief will be that no SDLT charge is payable at the point at which properties are initially transferred into the fund (or “seeded”) by investors.
Finance Bill 2016 is also proposing to change the SDLT treatment of PAIFs and ACSs, so that these are treated as if they were companies, and units in them are treated as if they were shares in a company. The effect of this is that no SDLT liability directly arises to the investors where chargeable property is acquired by an ACS or PAIF. Instead, SDLT liability on this acquisition will arise for the ACS or PAIF itself. There would also be no SDLT charged on issues, transfers and surrenders of units in an ACS or PAIF that holds any chargeable interest in land.