The future UK funds regime


HM Treasury has published a Call for Input on a review of the UK funds regime, focusing on both tax and regulatory reform. At this stage, the Call for Input is broad and relatively high-level: an important part of it is identifying which reforms should be taken forward for more detailed consideration and how these should be prioritised.

The deadline for responses is 20 April 2021. The government will then consult on specific proposals for reform, prioritising measures that have the greatest impact and those that can be delivered swiftly.


A fresh review of the UK funds regime has been keenly anticipated for some time. It was first announced by the government in the Budget 2020 and, on 9 November 2020, the Chancellor made a statement on the UK's future approach to financial services in which he reiterated the government’s intention to further enhance the UK’s attractiveness for asset management.

The overarching objective of the review is to identify options which hold the potential to enhance the UK as a location to set up, manage and administer funds, and which will support a wider range of more efficient investments better suited to investors’ needs.

This general review sits alongside the two-stage consultation on the tax treatment of asset holding companies (AHCs) in alternative fund structures which is already underway (discussed in our Tax News publication), together with the government’s commitment to review the VAT treatment of fund management fees (which it intends to take forward in 2021).


Describing the UK’s financial services industry as a “national asset” in his foreword, John Glen, Economic Secretary to the Treasury, notes that this new post-Brexit era is a key moment for the UK economy. In the government’s view, with the correct fund structures, tax regime and regulatory environment, the UK can unleash investment into productive and green technologies and support the government’s levelling up agenda.

While the UK is a leading jurisdiction for portfolio management, the government acknowledges it could do more to strengthen the UK’s attractiveness as a fund domicile by addressing barriers to establishing and running funds within the UK. With that in mind, the Call for Input focuses primarily on the UK’s approach to funds taxation and the regulatory framework for funds. It also explores opportunities for wider reform, including enhancing existing, and creating new, fund structures.

The government explicitly excludes from the scope of the review any analysis of the UK’s versions of AIFMD and the UCITS Directive, noting it does not intend to make changes to those “at this time”. The UK’s approach to the EU’s Sustainable Finance Disclosure Regulation is also outside the scope of this review as that is being considered separately (although the government hopes the review will help to facilitate the transition to net zero emissions by 2050 by improving routes in the UK funds regime through which capital can be committed into long-term investments which support these aims). In addition, the government uses the Call for Input as an opportunity to confirm its robust approach to tax avoidance and evasion, and its continued commitment to its international obligations and the highest standards of regulation, supervisory oversight and investor protection.

Areas for change

Approach to funds taxation

A basic tenet of fund structuring globally is that funds should be tax neutral for investors, i.e., an investor investing through a fund should be in a similar tax position as if they had invested in the underlying assets of the fund directly. The Call for Input considers that in most situations the UK funds regime is able to deliver tax-efficient outcomes. However, it goes on to acknowledge that, in some instances, achieving tax neutrality can be difficult and that concerns that have been raised about the competitiveness of the UK regime relative to other countries. In light of this, views are sought on the following areas of continued interest and/or concern for the industry:

  • the difficulties faced by funds in achieving tax neutrality, particularly where they invest in a mix of equity and debt instruments (so-called ‘multi-asset’ or ‘balanced funds’), and the low take up of Tax-Elected Funds (TEF) - which were intended to help overcome these issues - by the industry.

To address these concerns, the UK Funds Regime Working Group has made several suggestions, including changes to the tax rates applicable to UK funds (including a low rate of tax for authorised funds), deemed deductions for distributions at fund level, amendments to the TEF regime, and the extension of corporate streaming to individuals.

The government is also open to considering more fundamental change. This could include exempting authorised funds from tax altogether or creating a new unauthorised tax-exempt fund structure for investment in alternative assets. Either option would clearly represent a major shift in the UK’s current approach, and the broader implications (particularly the knock-on effect on access to treaty benefits) would need to be carefully considered;

  • a perception that there are unnecessary barriers and complexity within the existing Real Estate Investment Trust (REIT) rules. A number of possible reforms are outlined (and others are covered in the AHC consultation);
  • cases where the UK approach to VAT on fund management services can create incentives to locate funds outside of the UK. On this, as noted above, the government is looking for initial views ahead of a separate formal consultation at a later stage; and
  • tax treaty benefits historically enjoyed by UK funds, which the government notes will be of continued importance.

The decline in registrations of limited partnership funds is mentioned in the Call for Input, and the government asks: what are the barriers to the use of UK-domiciled limited partnership funds and private fund limited partnerships, and how might tax changes help to address them?

Approach to funds regulation

The Call for Input confirms that the government “remains committed to the highest standards of regulation and appropriate levels of supervisory oversight and investor protection” but is also alert to the need to adapt and evolve the regulatory and statutory framework for funds. It is looking at opportunities to enhance existing fund structures and the broader funds environment, as well as creating new fund structures, particularly to facilitate investment in long-term, illiquid assets and to meet the needs of alternative investment funds (AIFs) for professional investors. 

The government is interested in the use of authorised fund structures for certain types of professional investors (including DC pension schemes), and issues such as speed to market and how the authorisation process can be improved. The regime for Qualified Investor Schemes (QISs) gets a lot of focus in the Call for Input, with a number of suggestions for improvement made, including expanding the range of QIS permitted investments to allow for loan origination and investment in a wider range of other funds, increasing the 100% cap on borrowing, and further optimising the QIS sub-fund structure.

Opportunities for wider reform

The Call for Input concludes by asking respondents to consider some more macro issues, which cut across the tax and regulatory specifics.

Recognising the challenges of attracting fund vehicles from established fund hubs, the government intends to prioritise proposals which would enhance the UK’s reputation as a location for the creation of new funds over encouraging the “redomiciling” of existing funds. The government has also been urged to focus on proposals to enhance the UK’s reputation as a location for AIFs, as it has been told there are market access challenges for UK-domiciled retail funds. It seeks views on whether this is the right approach.

Looking at existing fund structures, the Call for Input asks about potential improvements to the Investment Trust Companies framework, and separately asks what changes could be made to rules on distribution of capital for authorised funds.

For new fund structures, the government explores the recommendation by the UK Funds Regime Working Group to establish a Long-Term Asset Fund (LTAF) - a new authorised open-ended fund structure designed to enable investors, particularly DC pension schemes, to invest more confidently invest in illiquid assets (such as venture capital and infrastructure) than they can using existing fund structures. There is significant momentum behind this proposal, and indeed the Chancellor in his November statement set out his ambition to see the first one established in 2021. The FCA plans to consult early in 2021 on setting up a framework for the LTAF. Getting the right regulatory framework and tax treatment will be key.

The government is also considering other new fund structures aimed only at professional investors, and there are a range of industry proposals for both unauthorised funds and funds with a ‘light-touch’ authorisation. These funds could take a variety of legal forms including contractual schemes, corporates and limited partnerships, and offer significant flexibility in terms of eligible asset classes and investment strategies. Across each of the proposals, there will be a range of tax issues that the government will need to consider.

Noting the significant asset management employment spread across the UK, the government is keen to spread the benefits of fund administration across the country, as this work does not need to be located in financial services hubs. Therefore, the government is interested in proposals to proactively encourage fund administration clusters to develop, and what UK policy interventions and expertise is needed to support that aim.

Next steps

As noted above, the deadline for responses is 20 April 2021. The government will then consult on specific proposals for reform, prioritising measures that have the greatest impact and those that can be delivered swiftly.

Future UK regulatory framework

The review of the funds regime is one of several workstreams the government has launched to shape the future of financial services regulation in the UK. Visit our dedicated future regulatory framework webpage for more information on the UK’s plans.