Tax Transparent Funds

In its UK investment management strategy document published on budget day 2013 HM Treasury confirmed that

 "By the end of spring 2013, two new authorised contractual (tax transparent) scheme (ACS) vehicles will be available for fund managers to establish in the UK"

So by 21st June there should be two more UK collective investment vehicles available to life companies. 

Tax transparent funds or ACSs can come in one of two flavours, one a limited partnership structure and the other a co  - ownership structure.  It is envisaged that the two types of ACS will use arrangements permitted by UCITs iv to provide "top level" funds that other UCITs funds can invest in.  

Pension companies are also mentioned in the strategy document as being potential investors in ACS vehicles for withholding tax reasons.  Presumably this is a reference to the current situation where if a UK pension company invests directly in US equities it will obtain a 0% withholding rate under the UK / USA double taxation agreement and associated competent authority agreement (see Philip's post of 16th April if you would like a link to the competent authority agreement).  However, if a UK pension company invests in US equities via a UK resident OEIC the OEIC will suffer withholding tax at the treaty rate of 15%.  If a pension company invests via a SICAV then the SICAV would suffer withholding on  US dividends at 30% as there is no US / Luxembourg DTA.

Investment by a UK pension company in an ACS should hopefully provide access to the 0% treaty rate (as the ACS is transparent  the pension company continues to own the assets) whilst allowing pooling of funds with cost savings etc.

There is some draft legislation for ACS vehicles including measures specific to the BLAGAB business of UK life insurance companies.  ACS vehicles established under the co  - ownership structure although transparent for income will not be transparent for CGT purposes i.e. the holding in the ACS will be treated as an asset subject to CGT.  (This will not be the case for ACS vehicles set up as limited partnerships where it will be necessary to keep track of CGT on an asset by asset basis.)  

The draft legislation also extends the deemed disposal legislation in TCGA 1992 212 to ACS vehicles established with a co  - ownership structure and introduces a new TCGA 211B that provides that when assets are transferred to a co  - ownership structure ACS wholly in exchange for units in the ACS being issued to a life insurance company then the transfer will be treated as no gain /  no loss.  This relief is extended to relevant offshore funds.  There is anti avoidance legislation when the ACS units issued are disposed of within three years of the end of the accounting period in which the transfer took place.  This is presumably to prevent life insurers using the ACS as a way of obtaining a 7 year spread of gains on assets that they wish to dispose of.  Which is a bit petty but in general the ability to transfer in to a contractual ownership ACS without realising a gain is welcome. 
Link to the draft legislation is below
http://www.hmrc.gov.uk/drafts/draft-cgt-regs.pdf