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Autumn Budget 2021

Private Equity and Investment Manager update

Alex Conway, Director, Private Equity and Professional Practices
29/10/2021
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The message of the autumn Budget was one around “levelling up” in the UK. However, there were a few items in the Chancellor's statement that will be of interest to private equity firms and investment managers.

Asset Holding Company Regime

The government have confirmed that a new Asset Holding Company Regime will be implemented from April 2022. The hope is that this will enhance the attractiveness of the UK as a location to establish an asset holding company, compared to other jurisdictions such as Luxemburg.

The regime will introduce a new framework for taxation of companies used by fund and institutional investors to make investments. Final rules are to be published with the Finance Bill on the 4 November 2021.

Basis Period Reform

Many investment managers are structured as LLPs. Meaning the members/partners of these businesses are taxed on their allocation of trading profits of the LLP. In line with the consultation published in July 2021 it has now been confirmed that the government will reform how member/partners will be assessed to tax with changes applying from the 2024/25 tax year and a transition year in 2023/24.

As noted in previous briefings, the change will mean that profits are assessed in the tax year they arise rather than on the profits of a 12-month set of accounts that ends in the tax year. This will impact any investment managers who do not have a 31 March year end.

An example

If a firm has a 31 December year-end, under the new rules the profits are pro-rated into the relevant tax year. Therefore, the profits for 2024/25 tax year would be 9/12 of the year to 31 December 2024 and 3/12 of the year to 31 December 2025.

In the 2023/24 transitional year the assessable profits would be for those of the year to 31 December 2023 plus 3/12 of the year to 31 December 2024 less overlap profits brought forward.

Where transitional profits are higher than would be the case under current rules, then it is proposed that there will be a spreading election, but at the partner rather than firmwide level.

The final legislation will be published in the Finance Bill on the 4th November 2021, which will provide more clarity on aspects such as the transition relief proposed and interaction of transition profits with allowances and benefits.

However, investment managers should be aware of the changes and plan for the extra tax that will arise in 2023/24 tax year (mainly being payable 31 January 2025 subject to spreading elections) and consider whether a change (if possible?) to a 31 March year end should be considered to simplify administration.

Annual Investment Allowance

It has been announced that the Annual Investment Allowance (AIA) will be maintained at £1 million until 31 March 2023. This will be of interest and benefit to any firm performing an office fit out during this period, accelerating tax relief on qualifying capital expenditure associated with the fit out.

Social Care Levy

The new social care levy, that was previously announced by the government, was confirmed in the autumn Budget and will apply from April 2022. Whilst the newspaper headline of this new levy related to the increase in tax on individual’s employment and self-employment income (along with an increase in employer NIC), the charge will also add 1.25% to the dividend tax rate.

Investment managers will obviously be affected by the change in respect of their employment /self-employment income. However, where investment managers also hold co-invest and carry allocations in their funds, they are likely to be further impacted and see an increase in their tax liabilities. This will occur where the return received from these carry and co-invest funds is received in the form of a dividend (which can include disallowed interest).

The impact of the changes is largely out of control of the individual investment managers, but investment managers should be aware of the changes and how this potentially impacts their future tax liabilities and whether any cashflow planning is required.

Where funds have the ability to roll dividends and sell the shares they have invested in cum-div (normally seen in preference shares) there is now a larger disparity between the dividend tax rate and capital gains tax rate, which may impact behaviour (i.e. whether a dividend is paid or rolled to exit).

For more information on the issues raised above or to discuss your circumstances, get in touch with Alex Conway or your usual Crowe contact.

News

The reform of basis periods will be implemented from 2024/25 onwards, the Chancellor has confirmed.
Chancellor announces extension of the temporary increase to £1,000,000 of the Annual Investment Allowance to 31 March 2023.
Two key changes that employers should be thinking about after the Budget announcement.
The reform of basis periods will be implemented from 2024/25 onwards, the Chancellor has confirmed.
Chancellor announces extension of the temporary increase to £1,000,000 of the Annual Investment Allowance to 31 March 2023.
Two key changes that employers should be thinking about after the Budget announcement.

Contact us

Nicky Owen
Nicky Owen
Partner, Professional Practices
London