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Budget 2016: Funds and Asset Managers

Budget 2016: Funds and Asset Managers

  • United Kingdom
  • Financial services and markets regulation
  • Tax planning and consultancy - Budget


The 2016 Budget contains many measures affecting the asset management industry more or less directly, some confirming existing announcements but many new.

UK individuals’ tax rates and allowances

The Chancellor has confirmed that the £5,000 dividend allowance and £1,000/£500 personal savings allowance will have effect from this April, as expected.

Newly announced is that from 5 April, the higher rate of capital gains tax will be reduced from 28% to 20%, and the basic rate will be reduced from 18% to 10% on the disposal of investments (but not for gains on carried interest and residential property).

The government also intends to introduce a new £1,000 allowance for property income from April 2017, and, on the face of it, this relief will exempt property income distributions from PAIFs (and UK REITs) as well as rental income.

These two new measures were unexpected and potentially further undermine the tax-benefits of ISAs.

Changes affecting authorised investment funds

Gross payment of interest distributions

The gross payment of interest distributions from OEICs and authorised unit trusts (as well as investment trusts and peer to peer loans) will come in in April 2017. The legislation will be in the 2017 Finance Bill so details will be available in due course. This hoped-for change should enable managers to simplify the class structures of their bond funds by streamlining their net and gross classes, as well as reducing the administrative burden of interest distributions.

Authorised contractual schemes

Regarding authorised contractual schemes, the government will consult later this year on measures to streamline the tax rules for investors in ACSs and their reporting requirements. We are hopeful that this will extend to both the various outstanding technical points that we and HMRC are aware of, but also to the application of capital allowances in property ACSs.


The stamp duty land tax regime for ACSs and seeding relief for ACSs and PAIFs has been confirmed as coming in to effect from Royal Assent to the Finance Bill 2016. We have heard direct from HM Treasury that the government has made a number of technical changes to the draft legislation, including changes to the calculation of the clawback on disposals of units so that it is not simply related to the number of units but the interest in the underlying assets. The clawback will apply at the group level in the case of corporate groups. In addition, investors will be able to elect to end the seeding period within 18 months by notifying HMRC.

Otherwise the overall policy design is unchanged. The draft legislation will be in the Finance Bill to be published on 24 March. The changes are welcome although they do not go as far as the industry wanted. The government has clearly decided to enact the measures without major changes and says it will work with the industry to assess the take up and efficacy of the changes after it comes in.


The government has at last announced that it will amend the Limited Partnerships Act 1907 to make LPs a more competitive vehicle for unauthorised funds.

The government is also launching a consultation on how partnerships calculate their tax liabilities in order to bring more certainty to the area.

The government has, as expected, finalised the rules that determine when asset managers can pay capital gains tax rather than income tax on their performance-related returns (carried interest). The investment holding period has been reduced to 3 years, which is welcome, but it will be necessary to look at the details in the Finance Bill being published on 24 March. Meanwhile, for further details, click here.

It is also worth noting that the reduction in the rate of capital gains tax will not apply to those carried interests that are taxed as capital gains.



The government has announced that it will allow ISA savings to continue after the death of ISA-holders for the benefit of their estate, which may simplify ISA administration. Fortunately, the government intends to talk to ISA providers about this before introducing it later this year.


Subscription limit

The government has announced that it will raise the ISA subscription limit to £20,000 from April 2017.

Lifetime ISA

The government intends to introduce a new “Lifetime ISA” in April 2017 for adults under the age of 40. They will be able to contribute up to £4,000 per year until they reach 50 and the government will add a 25% bonus for every pound saved. The Lifetime ISA funds, including the government bonus, can be used up to the age of 50. Taxpayers will be able to withdraw money from their Lifetime ISA, including the government bonus, at any time after 12 months from the opening of the account if it is used to buy a first home (maximum price £450,000). Otherwise the funds can be withdrawn from the Lifetime ISA with the government bonus from the age of 60 for use in retirement. It will also be possible to withdraw money at other times but the government will claw back the bonus (and levy a small charge).

The Help to Buy ISA will continue until November 2019 but individuals may receive only one government bonus, and those with help to buy ISAs will be able to transfer them into a Lifetime ISA during the 2017-18 tax year.

The government will also consider whether the Lifetime ISA funds together with the government bonus can be withdrawn in full for other specific life events in a similar way to US 401(k) plans.

Offshore property funds

Interest deductibility

A number of the changes announced in the Budget will affect offshore property funds, along with other property investments. Briefly, the government has decided to lead the way in implementing the G20 and OECD BEPS (Base Erosion and Profit Shifting) recommendations and announced that from April 2017 it will cap the amount of relief for interest to 30% of taxable earnings in the UK (or based on the net interest to earnings ratio for the worldwide group, which is likely to be more relevant for MNEs). There will be exception for public benefit infrastructure and also a £2m de minimis allowance. This expected change is likely to affect markedly the balance of advantage of using a geared offshore fund structure for UK property as against a tax-efficient onshore property fund, and may well lead to more offshore property funds coming onshore. The government has thankfully gone with 30%, that is, the top of the OECD range of acceptable figures.

The government has not referred to the European Commission's recent proposal that excludes UCITS and alternative investment funds but it has confirmed that it will continue to work with the OECD on appropriate rules for the banking and insurance sectors.

Property development

The government is also focusing on bringing all profits from UK property development in to the UK tax net. It is going to introduce legislation in the 2016 Finance Bill to prevent offshore structures being used to do this as well as creating a taskforce to focus on offshore property developers.


There are also major changes to the SDLT system, which will increase the cost of investing in both commercial and residential property. Please click here for further details. One consequence of this will be to increase the attractiveness of investing in property through PAIFs, UK REITs and ACSs.

Please view our dedicated Budget 2016 hub here. It will give you access to our watch list, our contributors and relevant articles and tweets.

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