Making The UK More Competitive

Tom Squire and Martin Connolly discuss how new legislation is making the UK a more attractive domicile for UCITS funds.

HM Treasury has taken steps to further improve the attractiveness of the UK as a domicile for undertakings for collective investment in transferable securities (UCITS) funds. A consultation has been announced with a view to launching an authorised UK tax transparent fund (TTF) vehicle. Draft regulations for consultation are expected by late 2011 with secondary legislation implementing the regime expected by summer 2012.

The UK has typically not been the domicile of choice for UCITS funds, with the market standard being either Ireland or Luxembourg. The UK does have several attractive characteristics as a domicile for UCITS funds due to its robust regulatory process and extensive network of double tax treaties. However, these are often outweighed by factors such as the speed at which a fund can be launched and the perceived certainty and stability of the tax and regulatory environment offered by other jurisdictions.

The lack of a true TTF vehicle has also been one of the key areas where the UK has lagged behind. Competitor jurisdictions such as Ireland and Luxembourg have tax transparent vehicles such as the Common Contractual Fund and Communs de Placement respectively.

While the UK does offer a variety of legal structures for investment pooling, such as unit trusts, open-ended investment companies and investment trusts, it does not offer a true TTF vehicle to compete with Ireland and Luxembourg. Currently, only a number of pseudo-TTF vehicles, such as property authorised investment funds and tax elected funds, exist.

The lack of true tax transparency introduces an additional layer of taxation at the fund level, increasing the effective tax burden on investors due to withholding taxes being applied without regard to the underlying investor type or domicile, directly reducing fund performance and investor returns.

Non-TTFs are not tax neutral and introduce a cost to investing via a fund rather than investing directly. Fund managers often cite being able to achieve tax neutrality in the fund structure as a key consideration when selecting a fund domicile.

The implementation of UCITS IV into UK law from 1 July 2011, allowing for pan- European master-feeder UCITS structures, has provided the necessary spur for reform and the establishment of a truly tax transparent UK fund vehicle. A UK TTF would enable investors to pool their...