Balanced Funds and Non - resident AIFs

I was having a bit of a think about the issues thrown up by the potential end of corporate streaming.  At the ILAG seminar (see post of 17th September for details) this was mentioned as being particularly problematic for pension business assets invested in balanced funds.  

This slightly surprised me as although there is an issue with balanced funds I'd seen property funds as being the real problem if corporate streaming was abolished (as all the income in a property fund is taxable but only some of a balanced fund's income is taxable).  Perhaps the point is that for property investments there are plenty of alternatives to AIFs.  Firstly there seems to be a rash of conversions to PAIFs (see post of 4th September) and a good proportion of life insurance investment in property funds is in transparent for income vehicles typically Jersey Property Unit Trusts.

This set me thinking about alternatives to UK resident AIFs for balanced investment strategies for pension business assets.  The most straightforward approach would seem to be to disinvest from a UK AIF and invest in an equivalent non  - UK resident fund (Irish OEIC, Lux SICAV).  As these entities are not subject to tax on income in the AIF then there will be no tax leakage for life companies investing pension business assets.  For withholding tax reasons an Irish OEIC might well be preferable to a Lux SICAV (Luxembourg suffers 30% withholding on dividends paid from the USA).

An offshore balanced AIF might also be an attractive option for BLAGAB investments of a UK life insurer but the tax position would need some thinking through.

If an offshore AIF wasn't felt to be suitable for pension business balanced investments then a UK tax Exempt Fund would be another alternative.  Finally the life insurance company could invest directly into the assets concerned.  This would probably minimize tax leakage as direct investment would allow the life company to take advantage of the reduced withholding tax rates available for dividends paid to pension "schemes" in various double taxation treaties.  (See post of 6th May).