Budget 2017 for Asset Managers

The Government delivered its UK Budget for 2018 on 22 November 2017.  Placed in the same news reel as relatively muted predictions of UK economic performance, the Chancellor announced a number of tax measures and consultations, many of which were relatively benign and designed to produce continuity of the tax regime against the backdrop of the uncertain Brexit negotiations.

However, some changes were headline-grabbing – notably the exemption from SDLT for first time buyers of properties valued at up to £300,000, the very significant changes to the Venture Capital Regimes in response to the Patient Capital Review, and a pronounced attack on offshore property investment vehicles.  Overall, the announcements relevant to alternative asset managers were, however, somewhat more subtle. This note provides a brief overview of them.

Entrepreneurs’ Relief

The Government announced a consultation on whether individuals can retain entrepreneurs’ relief after their shareholding falls below the relevant 5% threshold.  The proposal is for relief to remain available on gains accrued up to the date that the individual’s shareholding is diluted because capital is raised from external investors for commercial purposes.  The intention is to incentivise entrepreneurs to remain involved in their businesses after external investment comes in.  The consultation has been announced for spring 2018 with the intention to introduce this measure into law with effect from April 2019.

R&D Tax Relief

The Research & Development Expenditure Credit rate available to companies claiming under the large company R&D scheme will increase from 11% to 12% from 1 January 2018.

Carried interest

The Government is amending the carried interest tax legislation in Finance (No. 2) Act 2015 so that an exclusion of certain gains from taxation, initially introduced as a transitional measure, no longer applies from 22 November 2017.  Specifically, certain sums could be excluded from taxation if relating to assets disposed of on or after 8 July 2015.  This exclusion is now being removed.


There are a number of previously announced changes to the taxation of partnerships that have now been confirmed. The measures are intended to clarify certain aspects of the taxation of partnerships, principally:

  1. who to name and what information to include when reporting income where a partnership has partners who are bare trustees for another person or where the partner is a partnership itself; and
  2. the allocation of partnership profits for tax purposes will be required to be allocated in the same ratio as the commercial profits as well as clarifying that the allocation of partnership profits shown on the partnership return is the allocation that applies for tax purposes.

The changes will have effect from the tax year 2018-19.

Venture Capital Schemes

The Venture Capital Trust (“VCT”) and Enterprise Investment Scheme (“EIS”) regimes saw by far the largest number of changes. This was essentially in consequence of the Patient Capital Review.

Increase in limits

From 6 April 2018, the annual EIS limit will be increased to £2m, provided that the excess over £1m is invested in qualifying “knowledge-intensive” companies.  Broadly, knowledge-intensive companies are those which are primarily engaged in the creation of intellectual property and/or employ a high proportion of skilled employees.

The annual limit on funding which a qualifying company may attract under the EIS, as well as the VCT regime will also be increased from £5m to £10m.

Risk to capital

A new “risk to capital condition” will be included in the EIS and VCT legislation, requiring that companies are genuine entrepreneurial companies.  The measures will take the form of a principles-based test to determine if, at the time of the investment, a company is a genuinely entrepreneurial company, requiring a conclusion to be reached as to whether the company has objectives to grow and develop and whether there is significant risk of loss of capital.   This change is being introduced in order to exclude investments which are perceived by HMRC as purely tax-motivated, which currently receive tax relief but with limited risk to the investor’s capital.

The changes will have effect for investments made on and after Royal Assent of Finance Bill 18 and detailed guidance is expected after publication of the Finance Bill 2018 which is scheduled for 1 December 2018.

Share buy-backs

The VCT legislation will be amended to limit the scope of an anti-abuse rule relating to share buy-backs by VCTs. When the date of the restructuring or merger is more than two years after the date of the subscription of shares or when such date is less than two years but at the time of the subscription the individuals subscribing for the shares could not reasonably be expected to know that the merger or restructuring was likely to take place or if obtaining a tax advantage is not one of the main purposes of the merger, the anti-abuse rule will not apply.

Consultation on an innovative EIS fund

In response to the Patient Capital Review consultation, the Government has announced that it will consult in 2018 on the introduction of a new knowledge intensive EIS fund structure in which funds would have flexibility to deploy capital raised over a longer period.

Other VCT reforms

The government will legislate in the Finance Bill 2018 to move VCTs towards higher risk investments by implementing a number of measures.  These include:

  • removing certain “grandfathering” provisions that enable VCTs to invest in companies under rules in place at the time funds were raised, with effect from 6 April 2018;
  • requiring 30% of funds raised in an accounting period to be invested in qualifying holdings within 12 months after the end of the accounting period, with effect from 6 April 2018;
  • increasing the proportion of VCT funds that must be held in qualifying holdings to 80%, with effect for accounting periods beginning on or after 6 April 2019;
  • increasing the time to reinvest the proceeds on disposal of qualifying holdings from six months to 12 months for disposals on or after 6 April 2019; and
  • introducing a new anti-abuse rule to prevent loans being used to preserve and return equity capital to investors, with effect on and after Royal Assent of Finance Bill 2018.

Aggregation of investments

The Government will also legislate to ensure all risk finance investments, whenever made, will count towards the lifetime funding limits for companies receiving investments under the EIS and VCT scheme. The current rules exclude certain investments made before 2012.

Real estate

The Government has announced proposals which would significantly affect the taxation of real property held by non-residents.  All UK property gains by non-residents will be brought within the scope of UK taxation from April 2019. The rules will apply to:

  • direct disposals of commercial and residential property to the extent not already caught by the residential property capital gains tax rules introduced in 2015; and
  • indirect disposals through the sale of entities where the entity disposed of derives at least 75% of its value from UK land and the non-resident seller holds at least a 25% interest in the entity over the 5 years prior to disposal. The 75% test will be assessed on a gross asset market value basis.

Existing commercial property holdings and indirect residential property holdings will be rebased as at April 2019.  Therefore, only gains after that date should fall within the new rules.

The existing exemption within the residential property capital gains tax rules for certain widely-held companies will be abolished from April 2019.   Widely-held companies will therefore have a rebasing of their residential properties as at that date. This is of particular relevance to non-resident collective investment (fund) vehicles holding UK property because these may become subject to UK corporation tax on chargeable gains as a result.

Closely held companies will retain the existing April 2015 rebasing point for residential property.  Although the proposals are subject to consultation, the core features of the measures are described by HMRC as ‘fixed’.   One interpretation is that the consultation will merely focus on ensuring the legislation is effectively targeted and does not place unnecessary burdens on affected taxpayers.

The Government has separately announced that rental income received by non-UK resident companies from UK property (i.e, by non-resident landlords) will be chargeable to corporation tax, rather than income tax.  While corporation tax is scheduled to decrease to 17% in 2020 and income tax would be 20%, the change could nevertheless be material for offshore companies because the corporation tax rules have very different restrictions on interest and loss deductions than the income tax rules.

Royalties withholding

The Government intends to widen the circumstances in which royalty payments to non-UK residents will be subject to withholding tax.  Royalties are already subject to 20% withholding tax, but the focus here is on multinational digital businesses that pay royalties to low tax jurisdictions in respect of UK sales.  The proposal is to bring non-UK resident companies within the scope of UK income tax in circumstances where goods or services are provided to UK customers.  A consultation will be launched on 1 December 2017.

It should be noted that Brexit potentially creates significant uncertainty as regards the application of withholding taxes on royalty, interest and dividend payments between the UK and EU member states.  Under various EU Directives, interest, royalty and dividend payments between affiliated enterprises in the EU must be paid free of withholding that would otherwise apply.  It is presently unclear how these withholding tax exemptions would be dealt with when Brexit takes effect.


The Government will consult on how to deal with non-compliance with the IR35 rules (now found in the Income Tax (Earnings and Pensions) Act 2003) in the private sector.  IR35 prescribes that workers engaged via intermediary companies who are deemed to be “disguised employees” must pay NIC and normal income tax.  The Government’s intention is to move the obligation to assess tax status to the end-client whom ultimately engages the worker via the intermediary.

Taxation of trusts

The Government will publish a consultation in 2018 on how to make the taxation of trusts “simpler, fairer and more transparent”.  Little information has been provided in this regard.

Requirement to notify HMRC of offshore structures

As previously announced, the Government will publish a response to a consultation carried out between December 2016 and February 2017.  The proposal is to require businesses or intermediaries creating or promoting certain types of complex offshore financial arrangements to notify HMRC of these structures and the details of their clients using these arrangements.  The response document will be published on 1 December 2017.

OECD Base Erosion and Profit Shifting Project

The UK signed the OECD’s BEPS multilateral instrument (the “MLI”) on 7 June 2017, which substantially changes the provisions of double tax agreements, including the definition of “Permanent Establishment”.  However, in order to modify the UK’s double taxation agreements, the MLI must be given effect in UK law.  Accordingly, the Government will introduce legislation in Finance Bill 2018 to give effect to the modification of the UK’s double taxation agreements in accordance with the provisions of the MLI.  The measure is intended to take effect on the date of Royal Assent to Finance Bill 2018.