The UK is the second largest center for asset management globally, with the UK trade body, the Investment Association (“IA”), estimating that its UK members have assets under management in excess of £8.1 trillion.

While the UK is internationally recognized as a leading asset management hub, asset managers tend to look to established fund centers such as Ireland and Luxembourg for holding structures to house investments within cross-border alternative funds.

Consistent with the themes discussed in this series of articles, we are seeing asset managers reassess appropriate fund and holding company jurisdictions. 

The UK is an obvious choice for the location of funds and asset holding vehicles, given the UK’s market position and significant asset management industry. This presence helps asset managers navigate the emerging themes of substance and the impacts of COVID-19. The UK has a stable legal regime, has pools of talent in centers such as London and Edinburgh, and is an international hub for all financial services. From a tax perspective, the UK has one of the world’s largest double tax treaty networks with over 130 treaties and has competitive features such as no dividend withholding tax.

Some barriers limit the broad use of UK funds and holding vehicles outside of the domestic market. A working group formed by the IA is actively working to recommend solutions to ensure the UK remains competitive vis-a-vis developments in other jurisdictions. The findings of this group have been reported to the Asset Management Task Force established by HM Treasury as part of the UK Investment Management Strategy. This has led to a consultation into the tax treatment of UK asset holding companies in alternative fund structures, and a broader consultation into UK funds is anticipated to be opened later this year.

This article comments on the current environment for UK funds and possible reform to the UK asset holding company tax regime.

Current UK fund environment

The UK funds regime permits the establishment of a variety of fund structures with differing levels of investor protection and investment and borrowing powers. The available structures include companies, trusts, contractual schemes, and limited partnerships. Funds can be regulated and unregulated, with a range of regulated funds from UCITS to Qualified Investor Schemes. However, the current regime for Qualified Investors has a number of requirements and has more restrictions compared to other jurisdictions’ fund regimes for professional investors.

The UK tax treatment of funds generally means that there is no tax leakage within the fund vehicle. In addition, funds with sufficient substance in the UK can generally benefit from the UK’s comprehensive double tax treaty network. 

The IA Working Group report to the HM Treasury Task Force proposes reforms including a broadening of the type of funds available to allow (i) an Onshore Professional Fund (or Professional Investor Fund) with fewer investment and borrowing restrictions, and (ii) a Long-Term Asset Fund with less frequent redemption rights to facilitate wider collective investment into alternative or illiquid assets.

We also expect that HMRC will open a public consultation on the tax rules for investment funds and the VAT treatment of fees charged to fund vehicles. We expect these reforms to help increase UK funds attractiveness to global investors.

Asset Holding Company regime and future reform

The UK has a competitive holding company regime, including a 19 percent corporation tax rate, no withholding tax on distributions, and one of the world’s largest treaty networks. However, UK asset holding companies have not to date been widely adopted as holding structures within alternative fund structures. There are multiple reasons for this including perceived complexity and the trend of locating (where possible) asset holding companies in the same jurisdiction as the main fund vehicle (which are often non-UK vehicles).

One potential challenge may also be that the requirements of the UK substantial shareholding exemption compared to a more straight-forward participation style exemption seen in other jurisdictions for disposals of target companies. The current UK rules may require an assessment of the activities of the target investment, or for investors to fall within specific categories. There are also rules preventing deductions on profit participating debt and rules on the tax treatment of capital distributions. These additional requirements beyond those of other jurisdictions can limit the UK’s attractiveness.

However, as part of the UK Budget 2020 a consultation was launched by HM Treasury launched a consultation into these challenges as part of the UK Budget 2020. The consultation document provided commentary on the reasons for the use of asset holding companies, perceived and actual barriers, and how policy changes could be implemented. Participants were invited to comment, and KPMG has made representations. Proposed reforms include the introduction of a simplified corporation tax regime incorporating a more straight-forward participation style exemption alongside other simplifications. The consultation closed on 19 August 2020. 

In parallel, a separate consultation was launched on the hybrid mismatch rules. Amongst other things, this is anticipated to address the position for exempt investors invested in hybrid funds, and the “acting together” provisions in the context of fund partnerships.

These reforms, as well as the proposed broader fund reform, are intended to increase the attractiveness of UK asset holding companies for alternative fund investments. Given that many asset managers have existing operations in the UK, the use of a UK vehicle should help managers and investors navigate emerging trends relating to BEPS with existing operations in the UK that are generally contained within the management group, providing substance.

Closing remarks

We expect the proposed reforms to maintain and develop the UK’s position as an international center for asset management. The proposed reforms are timely and offer a potential opportunity for asset managers and institutional investors to adopt UK structures in order to help navigate the emerging themes relating to substance, responsible tax treaty qualification, and the impact of COVID-19 – such as reduced mobility. In addition to navigating the emerging themes, UK structures can also simplify operating models through substance and UK operations.

On the back of reform, we expect UK asset holding structures and funds to become increasingly prominent across all asset classes. KPMG is actively monitoring and participating in the various consultations and welcome the opportunity to discuss our views with the industry.


Unless otherwise noted, all information within this article was contributed by KPMG professionals in the UK based on their experience in the UK as well as local laws and regulations within the UK.

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