Authorised Contractual Schemes (ACSs)

Authorised Contractual Schemes are also known as tax-transparent funds. The regime was introduced in the Collective Investment in Transferable Securities (Contractual Scheme) Regulations 2013, and the FCA’s rules for the authorisation of ACSs.

The idea behind the ACS regime was to bring the UKs fund range in line with those offered in jurisdictions such as Luxembourg and Ireland. The regime puts their investors in the same position (or better) with regard to income and capital gains taxes then they would have been in if they had invested directly in the underlying fund assets. In particular, it generally enables investors to obtain their correct rates of withholding tax under applicable double tax treaties (which is not always the case if they invest in other pooled arrangements).

ACSs can be established in two legal forms: (i) as authorised co-ownership schemes, and (ii) as authorised limited partnership funds. Both these forms are available as UCITS, NURS and QIS.

ACSs were designed to be institutional funds. Direct investment in an ACS is limited to investors who either invest a minimum of £1 million or are professional institutional investors. Other investors can access an ACS through feeder funds.

In a co-ownership fund the investors have interests in the scheme property as tenants-in-common (if formed under English law or as common property of the participants if Scots law applies), although it is held on their behalf by a depositary. The fund is essentially a contract entered into by each investor with the operator (the ACS manager) and the depositary of the fund.

The FCA’s Handbook of Rules and Guidance governs authorised co-ownership funds, in particular in the Collective Investment Schemes Sourcebook, COLL. Accordingly they must have a prospectus along the same lines as for other authorised funds as well as the ACS deed. The main differences between ACSs and other authorised funds are not in their constitutional documents but rather in their administrative arrangements.

Authorised limited partnership funds are broadly similar to other UK limited partnerships. They benefit from (i) investors being able to redeem interests in the fund without remaining liable for the partnership’s debts so there is no need to structure partnership interests as loans, (ii) the general partner not being liable for the debts of the limited partnership unless guilty of manifest wrongdoing so it is possible to use the same company to manage OEICs, authorised unit trusts and ACSs, and (iii) not needing to publish partnership changes. An authorised limited partnership fund therefore operates similarly to other collective investment schemes.

Both types of ACS are transparent for UK income tax purposes so they are not subject to income or corporation tax on their income. Instead, the unitholders are liable to tax where appropriate on their proportionate interest in the underlying income. The ACS's tax transparency is intended to allow unitholders in them to benefit from reduced rates of withholding tax under double tax treaties between each unitholder’s own state and the state in which each investment is located.

The position regarding capital gains realised on the disposal of investments by authorised co-ownership schemes is similar, that is, there is no tax in the fund itself. However, for simplicity, UK taxpayers are taxed as if their interest in the fund was an asset for capital gains purposes (and not the underlying assets); this is not relevant to investors outside the UK tax system.

The UK tax position of authorised limited partnerships is the same as other UK (and non-UK) partnerships; they are tax-transparent for UK income and capital gains tax purposes.

Co-ownership ACSs also benefit from favourable UK stamp tax treatment including seeding reliefs for securities and property (except for land and buildings transation tax).. They also benefit from exemption from VAT (value added tax) on their management fees like other UK authorised investment funds.

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