Key items for your agenda in 2024
Our standout items
Potential changes to the UK carried interest and non-dom tax regimes
What’s happening?
2024 is expected to be an election year in the UK, and the Labour Party currently has a significant lead in the polls. It has said that if elected it will abolish the “carried interest loophole” and replace the current preferential tax regime for those tax resident but not domiciled in the UK with a “modern scheme for people who are genuinely living in the UK for short periods.”
So what?
These changes would have a significant impact on asset managers. With the next UK general election likely in 2024, alternative asset managers should think about the effect on their businesses and consider modelling potential impacts. We know that some GPs have already done some modelling and that has given them a really helpful framework for starting to think about these potential changes.
Revamp of the EU ELTIF (ELTIF 2.0)
What’s happening?
The ELTIF was launched in 2015 but – despite its full EU retail passport – take up has been poor as the rules have made it cumbersome to operate. Helpfully, the EU has agreed a number of reforms to address some of the major obstacles undermining its attractiveness, including significantly broadening the eligible investment universe, reducing certain investment thresholds, and removing unnecessary barriers to retail investor participation.
So what?
Alternative asset managers will no doubt be considering the revamped ELTIF as an option for fund launches this year. We expect the significantly more attractive 2.0 version to be much more popular than its predecessor. We will share our insights on its uptake later in the year.
For our thoughts as to whether 2024 will be the year of the ELTIF please see our briefing.
While it is tempting to aim for the lowest common denominator – namely an ELTIF that replicates the existing Part II market terms – we have to remember that the regulators are looking at the ELTIF in the context of a product that can be marketed to just about any individual in Europe. What we don’t want is an event that results in the whole sector being over regulated. Equally, we do want the ability for the right managers to have the right flexibility to design products for the right clients. In order to achieve this end result, we may just have to accept some limitations in the design and use of funds that can be distributed to all investors.
Will Normand
Partner
Other things to keep a close eye on
First year of minimum corporate tax rate
What’s happening?
The Global Anti-Base Erosion (GloBE) rules are arguably the most ambitious element of the OECD’s ongoing BEPS project. They establish a global minimum corporate tax rate of 15% for multinational enterprises (MNEs) that meet a €750m revenue threshold. Exclusions apply, including for investment funds and their holding vehicles.
So what?
Investment funds are unlikely to be subject to top-up taxes, but asset managers should be thinking about the GloBE Rules in relation to investments in large MNEs. In addition, the biggest asset managers have been considering the extent to which the rules will impact on their house arrangements.
Given the scale of the GloBE initiative, we expect that there will be some teething problems for MNEs (and tax authorities), as they work through how to apply the complex new regime in practice.
The rules came into effect in several jurisdictions, including the UK and most EU member states, for accounting periods starting on or after 31 December 2023.
What’s happening?
The draft directive includes enhanced obligations on AIFMs not to charge “undue costs” including obligations to operate an effective pricing process and to reimburse the fund or investors for any undue costs charged. Costs borne by retail investors must be justified and proportionate and there may also be benchmarks to facilitate the comparative assessment of costs and performance of AIFs.
So what?
The new directive is expected to be progressed in 2024 with an effective date of late 2025/early 2026.
Despite its name, not all of the proposals are limited to funds with retail investors and may therefore also affect AIFMs with professional investors. As the rules are still being negotiated, their impact on AIFMs remains uncertain. We’ll keep you updated.
Progress on new UK Retail Disclosure Regime
What’s happening?
Under the new framework, PRIIPs (packaged retail investment and insurance-based products) would be rebranded as “Consumer Composite Investments” and the UK PRIIPs Regulation would be repealed. UCITS would also be within the scope of the new regime.
New designated activities of “advising on a consumer composite investment”; “manufacturing a consumer composite investment”; and “offering a consumer composite investment” would also be created and would apply to both authorised and non-authorised persons.
What does this mean for me?
The UK Government intends to legislate in 2024, but we do not know when exactly the regime will start to apply. The main obligations will actually be contained in FCA rules, and these have not yet been consulted on. There are likely to be some transitional provisions but the new regime is expected to apply in full from 1 January 2027.
We will keep you up to date as we know more.
UK Reserved Investor Fund (Contractual Scheme) (RIF)
What’s happening?
The RIF is a new fund vehicle being considered by the UK Government. It is likely to be primarily of interest to investors in real estate. Indeed, for the right investor base, it could be an onshore rival to the Jersey property unit trust (JPUT). It is proposed that the RIF will be available to professional investors, as well as those who invest at least £1m (or have already invested in it).
So what?
As the RIF will be unauthorised, it should be flexible and easy to use. Our view is that this, combined with the generous UK tax treatment being proposed, should make it attractive for investors in UK real estate.
Progress is expected in 2024, and the new vehicle may be available from as early as April 2025.
Changes to UK’s financial promotion exemptions
What’s happening?
The UK’s financial promotion exemptions for high-net-worth individuals and sophisticated investors are to be amended.
The changes include increasing the thresholds in the high-net-worth individual exemption to income of ≥ £170,000 (previously £100,000) and net assets of ≥ £430,000 (previously £250,000), and amending the sophisticated investor exemption to remove the criterion of having made more than one investment in an unlisted company in the previous two years and update the threshold in the company director criterion to £1.6m (previously £1m).
What does this mean for me?
The requirements apply from 31 January 2024 (although it may be possible to rely on an exemption for follow-up communications for a period of up to 12 months).
The changes will apply to financial promotions made by unauthorised persons and also authorised persons in respect of collective investment schemes. Although persons relying on the exemptions may need to update investor statements, ensure compliance with the new contents requirements and update internal policies and procedures, we do not expect the changes to materially impact on investments received by funds.
Miscellaneous income appeals in the UK courts
What’s happening?
A series of cases have been working their way through the UK courts in which HMRC has successfully applied the, previously rarely used, “miscellaneous income” tax charge to an LLP member remuneration structure used by hedge fund managers. Although the structure was fairly aggressive, HMRC’s success has left asset managers unsure of the extent to which the same tax charge could apply to their remuneration arrangements.
So what?
Two cases on “miscellaneous income” have reached the UK’s Court of Appeal. The first, BlueCrest, was decided in favour of HMRC in December 2023, and we are waiting to see if the taxpayer appeals to the Supreme Court. The hearing for the second, HFFX, is due by April 2024 and we expect the conditions for the charge to be considered. We know asset managers are following the proceedings with interest.
As HMRC takes an increasingly assertive approach, we expect to see even greater scrutiny of asset managers’ remuneration arrangements in 2024, and “miscellaneous income” may become an important weapon in its armoury.
Elena Rowlands
Partner
