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By Ben Stupples
Aug. 10 — A 20 billion pound ($26 billion) collective scheme in the U.K., used by the likes of the world's biggest asset manager BlackRock Inc., is set to come under further government tax reporting requirements but enjoy provisions to encourage further property fund investment.
Her Majesty’s Revenue and Customs, in an Aug. 9 consultation, highlighted proposals to Authorised Contractual Schemes, or ACS, a U.K.-domiciled collective investment scheme introduced in 2013 to compete with overseas funds.
The proposals would increase tax reporting requirements for fund operators and clarify how investors might be able to claim capital allowance tax relief. Capital allowances provide tax relief for real estate investors, owners and occupiers.
“The people affected most will be property fund managers who will shortly be able to launch ACSs to invest in English, Welsh and Northern Irish property,” said Camilla Spielman, a London-based legal tax director at global law firm Eversheds LLP. “It’s effectively going to mean all the funds that would have set up in Jersey as a property unit trust can now have the same tax treatment in the U.K.”
“This is something that we’ve been asking about for some time,” said Gordon Gray, a capital and investments tax lead at KPMG LLP in Edinburgh. “The capital allowances are the last part of the puzzle.”
ACSs are pooled investment funds targeted at institutional investors and commonly referred to as tax-transparent funds, as the investor—and not the fund—is only taxed on the gains received. The main objective for the U.K. introducing the schemes three years ago was to consolidate the U.K.’s position as the largest management center in Europe and earn a percentage of European pooled funds, according to a 2014 report on the schemes by PricewaterhouseCoopers LLP.
More than 20 billion pounds has been invested in the U.K. tax transparency schemes since they were introduced, with most created by insurance companies and investment managers, said Nathan Hall, a London-based investment management partner at KPMG who has helped to implement ACS.
KPMG's Gray said a total of seven ACS schemes are registered with the U.K.’s Financial Conduct Authority.
A spokesman for life, pensions and insurance company Scottish Widows Ltd., a subsidiary of Lloyds Banking Group Plc, said in a Aug. 11 e-mail that it has 3.4 billion pounds in ACS across two funds as of Aug. 5. The company has not decided yet whether it will respond to the ACS consultation, he added.
Hall described HMRC’s proposal to alter the capital allowance laws as a positive step, but questioned the decision to increase the reporting requirements for the operator of the collective funds, which HMRC said will provide U.K. investors with sufficient information to pay the correct amount of tax.
“We will be asking for them to rein in the reporting restrictions, which we didn’t see coming,” he said. “We’re not really sure what the problem is, given that ACSs to date are held by big institutions, like pension funds and insurance companies, which are getting all the information they need.”
BlackRock, the New York-based investment manager with $4.6 trillion of assets under management, created the U.K.’s first tax transparency fund in July 2014. The company’s fund has 97.9 percent of its investments in U.S. multinationals—including Apple Inc. and Microsoft Corp.—and has assets with a value of 753.2 million pounds ($979.4 million), according to data compiled by Bloomberg BNA.
Legal and General Investment Management, which was 757 million pounds under management, also launched its own ACS in June 2016. The fund invests in both U.S. and U.K. shares and bonds, and will charge an annual fee of 60,000 pounds once the fund’s assets exceed 2.4 billion pounds, according to its online prospectus. A spokeswoman for Legal & General Group Plc, the parent company for Legal and General Investment Management, didn't return two calls to request comment.
Nolan Masters, a London-based director at capital allowance consultant Veritas Advisory, said any changes made following the government’s consultancy will ultimately have to be implemented by each operator of the scheme. This was the approach that has been taken in the past with similar funds, such as real estate investments trusts and property authorized investment funds, he said.
“The difference here is that under the ACS structure, the benefit of claiming capital allowances is at the investor level, not fund level,” he said. “So there is the potential for a conflict between the administrative cost and the benefit offered to its investors, but I would expect the latter to take precedent.”
A spokeswoman for BlackRock declined to comment, noting that the consultation—which closes Oct. 3—is still being reviewed by the company. Spokespersons for the U.K.’s Investment Association and Her Majesty’s Revenue and Customs were unavailable for comment.
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The consultation document, Authorized contractual schemes: reducing tax complexity for investors is at http://src.bna.com/hDL
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
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