UK seeks to implement tax-transparent fund to retain £500bn of assets
UK - The UK government is planning to change secondary legislation to enable the launch of a 'tax-transparent fund' vehicle (TTF) by the middle of next year.
Most European countries have not embraced these vehicles - with the exception of Ireland and Luxembourg, which have already adopted tax-transparent funds and continue to attract a high number of fund managers.
But the UK is now moving ahead with plans to implement a TTF as early as 2012 as the new UCITS IV directive and its master feeder structures come to market.
The UCITS IV directive permits the creation of feeder funds that would allow different types of investors to invest in master structures across Europe.
According to Aaron Overy, head of asset pooling at Northern Trust, the introduction of a TTF would enable the UK to retain as much as £500bn of assets.
"There are several reasons for which the government needs to amend the current second legislation to introduce a new tax-transparent fund," Overy told IPE.
"If the UK does not offer this type of product, several billions of assets will go offshore, mainly to Ireland or Luxembourg. This represents a real risk the Treasury does not want to take.
"There is also a change in the game with Solvency II. This new legislation requires insurance companies to hold more capital on their balance sheets, which means life insurance products - in which pension funds invest - will become more expensive. The need for tax unit funds will then be urgent for investors."
The UK's new TTF will be set up as a contractual vehicle that will facilitate direct investments by investors.
In the past, with trusts or company funds, some investors incurred higher effective tax rates than if they had invested directly in the market because withholding taxes applied at the fund level, with no regard to the underlying investor type or domicile.
Overy said: "With contractual funds, investors are taxed according to their own domicile, which enable them to benefit from double-taxation treaty arrangements between the country where the investor is from and the country where the investor invests. "
The government is now expected to consult formally on draft regulations in late 2011 before launching the new TTF in 2012.
Other countries, such as Germany and Australia, are also looking at tax-transparent funds and currently discussing the options to implement those vehicles.