IMA’s Patterson: Tax transparent funds and the boost to the UK fund domicile


The launch of two types of tax transparent funds earlier this month is a great step forward in increasing the competitiveness of the UK fund domicile relative to other European jurisdictions.

The new UK TTFs can be used within master-feeder arrangements (such as those allowed under the Ucits directive) and as pooling vehicles for institutions such as pension funds. Forms of TTFs are available in some other EU domiciles, but UK TTFs offer a number of benefits that can make them more attractive.

First, the UK TTF is specifically structured so as to ensure that as many other jurisdictions as possible recognise it as a tax transparent vehicle, and the UK has one of the most extensive double taxation treaty networks, which will provide certainty of treatment for TTFs. The treatment of a TTF as transparent ensures that institutional investors, particularly pension funds, can benefit from reduced withholding taxes where these are available under the relevant double tax treaty.

Second, the UK has a robust fund governance regime, which stood the test of the credit crisis. For example, each fund must have an authorised fund manager, and the fund manager and the depositary are not in the same group of companies. Also, depositories in the UK have for many years been subject to similar governance and conduct of business rules as fund managers.

Finally, UK firms manage about 33 per cent of all assets under management in the EU making it the main centre for investment management on the continent and therefore the natural home for TTF master funds.

The launch of the two types of TTF – limited partnerships and co-ownership funds – will reinforce the UK as Europe’s leading financial centre.

The co-ownership scheme is a contractual fund – the scheme is not legally separate from its investors. It affords transparency on income, but is opaque for capital gains tax purposes. This means that it does not have to compute capital gains for every disposal within the fund, but treats the interest in the fund itself as an asset for capital gains purposes.

The partnership scheme is a normal UK limited partnership but is authorised as a fund. Partnerships are widely-recognised throughout the world as transparent for both income and capital purposes.

The industry has been engaged from the outset on consultations about tax transparent funds and the process is a great example of how business, government and the regulator can work collaboratively to achieve a positive outcome for investors, for the industry and for the UK.

This is an exciting time for the UK investment management industry as the government, through publication of its UK investment management strategy paper, is showing its firm commitment to making the UK one of the most competitive places in the world for the investment management sector. And the launch of TTFs is just one example of real progress underway.

Julie Patterson is director of authorised funds and tax at the IMA