Investment Funds 2024

Last Updated February 08, 2024


Law and Practice


Dechert LLP is a global law firm with 21 locations across the US, Europe, the Middle East and Asia. It has one of the largest investment fund practices in the world, with a record of innovation stretching back 40 years. It advises across the full range of mainstream and alternative asset classes and strategies, representing some of the world’s largest fund complexes. The asset management practice has dedicated lawyers across 17 offices and operates as a single practice group across the globe with no internal barriers to collaboration. Clients look to the team for support across the entire fund lifecycle, from development and formation to marketing, operations and transactions. It provides advice related to fund management and governance, and assists with the full range of regulatory and compliance issues, as well as investigations and litigation involving regulatory entities around the world.

The UK is regarded as one of the leading global asset management centres, with an investment funds industry covering both traditional and alternative asset classes. Due to having considerable experience and infrastructure, the UK is one of the most prominent jurisdictions for fund formations and has developed a sophisticated market, offering a range of both closed-ended and open-ended types of funds. The asset management industry is of vital importance to the UK's economy.

Within the UK market, alternative investment funds (AIFs) – as defined in the EU Alternative Investment Fund Managers Directive (AIFMD) and replicated in the UK's post-Brexit alternative investment fund manager (AIFM) legislation (UK AIFM Regime) – include private closed-ended funds, often structured as English or Scottish limited partnerships, which are commonly used for funds that focus on illiquid asset strategies (eg, private equity, venture capital, real estate, alternative credit and infrastructure funds). Listed closed-ended funds available for sale to the general public are also common, and are used for both liquid and illiquid asset strategies. The vehicles most often used are investment trust companies (ITCs) and, in the case of funds that intend to invest in real estate, real estate investment trusts (REITs).

Retail funds tend to be open-ended vehicles, which can be – from a regulatory perspective – either an undertaking for collective investment in transferable securities (UCITS) fund or a non-UCITS retail scheme (NURS). One of the key advantages of a UCITS fund is that it can be marketed to investors throughout the EU without the need for additional, local authorisation in each country, known as the UCITS marketing passport. Following Brexit, UK UCITS can no longer make use of this passport. A NURS provides a similar level of investor protection to that of a UCITS and allows the manager more flexibility in terms of the investments the fund can make.

In addition to the UCITS and NURS, there is also a more lightly regulated regime for institutional and certain other qualified investors: the qualified investor scheme (QIS).

The UK provides for a large number of open-ended vehicles that fall within these two categories, including authorised unit trusts (AUTs), open-ended investment companies (OEICs) and authorised contractual schemes (ACSs). Different authorisations apply, depending on the investments to be made. For example, OEICs that invest in real estate may be structured as property authorised investment funds (PAIFs), provided the relevant conditions are met, and OEICs that invest in unauthorised funds need to be authorised as funds of alternative investment funds (FAIFs).

Private Funds

The typical structure of a UK private equity or venture capital fund is most commonly an English limited partnership, which is a form of partnership governed by the Limited Partnerships Act 1907 (LP Act 1907). Under the LP Act 1907, English limited partnerships must have at least one general partner (GP), who is responsible for the management of the limited partnership, and one or more limited partners. Thus, investors in such funds are limited partners in the partnership. One of the fundamental attractions in the UK of a limited partnership structure for private closed-ended funds is that the limited partnership is a flexible vehicle in terms of internal governance and control.

In recognition of the importance of the private closed-ended funds business to the UK finance sector, the government introduced important reforms to the UK limited partnership law applicable to private funds, which took effect in 2017. The reforms introduced the concept of a “private fund limited partnership” (PFLP) – an English limited partnership with certain modifications, so as to simplify the regime, making it a more attractive and competitive choice of vehicle. Most private equity and venture capital funds (and related vehicles, such as co-investment vehicles and feeder funds) will fulfil the relevant PFLP conditions and can therefore choose to be designated as a PFLP (although it is not mandatory to do so).

It is also possible for a private closed-ended fund in the UK to be structured as a unit trust scheme. The English law concept of a trust has no equivalent in some other jurisdictions. It is a structure under which title to the fund's assets is held by a person with legal personality (the trustee) for the benefit of the fund's investors (the beneficiaries). The document constituting the trust (the trust deed) governs the relationship between the trustee and the beneficiaries, and strict fiduciary duties are owed by the trustee as a matter of law. A trust does not have a separate legal personality; all legal relationships are entered into by or on behalf of the trustee. These vehicles have historically most commonly been used for certain UK real estate fund structures.

In November 2021, rules came into effect for a new UK fund structure: the Long-Term Assets Fund (LTAF). The LTAF is a UK-authorised fund that is designed to be focused on long-term, illiquid assets and is particularly targeted at increasing defined contribution pension scheme investment into alternative assets.

The LTAF is an authorised fund so can be structured as an open-ended investment company (investment company with variable capital – ICVC), unit trust or contractual scheme. At the time of writing, the use of LTAFs remains limited, with only seven registered (three umbrella funds and four sub-funds), but there is continued hope that the LTAF will play a significant role in attracting long-term capital to the market in the future.

It would also be common for a UK-based private fund manager to establish its private closed-ended fund as an offshore vehicle (whether a partnership, a unit trust or a corporate entity). However, for the purposes of the description of closed-ended private funds in this chapter, the focus will be on English limited partnerships.

Listed Funds

The vehicles used most often are ITCs and REITs, which are typically structured as public limited companies under UK companies legislation and listed on a recognised stock exchange, most commonly the Premium Segment or the Specialist Funds Segment of the Main Market of the London Stock Exchange, although certain other stock exchanges both in and outside of the UK are possible.

As public limited companies, ITCs and REITs have a board of directors who are responsible for managing their affairs, and typically delegate the day-to-day operation of the investment trust. For example, investment management functions are usually delegated to a fund management company, a depositary/custodian will be appointed to be responsible for the safekeeping of the company's assets, a registrar will be responsible for the share register, and a broker will advise on the listing of the company's shares. The fund manager, depositary/custodian and broker will usually be authorised and regulated by the Financial Conduct Authority (FCA).

Private Funds

The statutory framework in the UK requires an English limited partnership to be registered as such. This entails providing an application for registration to the (public) Registrar for Limited Partnerships (held at Companies House), providing certain details including the name of each limited partner and the amount of capital contributed by each limited partner. This will be conclusive evidence that an English limited partnership came into existence on the date of registration. Any changes to these details during the continuance of the English limited partnership must be similarly registered within seven days of the relevant change.

The key document for private closed-ended funds is the limited partnership agreement, which is a freely negotiated contract, with very few provisions prescribed by law, and is not available publicly. All parties will heavily negotiate the agreement prior to its execution.

Other frequently used key fund documentation includes side letters (providing certain investors with specific terms required for their specific circumstances), the subscription agreement for investors to subscribe for a commitment and be admitted as a partner in the limited partnership, and the investment management agreement for the fund to appoint the manager.

Listed Funds

An ITC is typically a UK public limited company that has been approved by His Majesty's Revenue & Customs (HMRC) as an ITC for the purposes of the relevant tax legislation. ITCs are subject to special tax rules (discussed below). Similarly, a REIT is typically a UK public limited company that has been approved by HMRC as a REIT for the purposes of the relevant tax legislation. REITs are also subject to special tax rules (discussed below). Since April 2022, it has been possible to have an unlisted REIT where, broadly, it is at least 70% owned by institutional investors. This makes the REIT a potentially attractive private fund vehicle for the right investor base.

A key consideration when setting up an ITC or REIT is that the eligibility conditions (and, post-launch, the ongoing requirements) set out in the relevant tax legislation need to be met in order to gain the tax advantages enjoyed by such vehicles. Tax lawyers should be engaged early in the process to provide advice on the steps necessary for a company to meet these requirements. Offers in respect of ITCs and REITs are subject to the obligation to publish a prospectus under the domestic legislation deriving from the EU Prospectus Regulation. Where a prospectus is required, this will need to be approved in an EEA member state for use in the EEA, in addition to being approved by the FCA for use in the UK. The other key document produced will be the investment management agreement for the fund to appoint the manager.

Private Funds

The liability of a general partner for the debts and obligations of a partnership is unlimited, whereas the liability of the limited partner is limited to the amount of capital it contributes to that partnership. Also, unless the partnership is a PFLP, there is a restriction on the ability of limited partners to withdraw capital during the life of the partnership. To keep the capital element as small as possible, limited partners will typically split their commitments into a loan element (typically 99.99% of total commitments) and a capital contribution element (typically 0.01% of total commitments).

Listed Funds

In respect of ITCs and REITs, UK companies legislation limits the liability of the shareholders for company debts to the capital originally invested in the fund.

Private Funds

Although not required by UK law, the key marketing document that is usually used for a closed-ended private fund is a private placement memorandum (PPM). UK law generally requires that any marketing material, including a PPM, is “clear, fair and not misleading”. Depending on the intended recipient, the PPM may also need to be approved by an FCA-authorised person. Under the UK AIFM Regime, there are also specific requirements to make set disclosures to investors prior to their investment into the fund. These disclosures are usually included in the PPM.

Listed Funds

In addition to the UK AIFM Regime disclosure requirements, ITCs and REITs must also comply with the disclosure requirements set out in the FCA's listing, prospectus, disclosure guidance and transparency rules.

Under UK companies legislation and the FCA's listing, disclosure guidance and transparency rules, UK incorporated ITCs must also publish annual and semi-annual reports and accounts. The annual report and accounts must be prepared in accordance with the applicable accounting standards, and must give a true and fair view of the assets, liabilities, financial position and profit and loss of the company. The semi-annual financial reports do not need to be audited, but it is common practice to ask the auditor to cast an eye over them, and the audit committee of the fund should certainly review them.

Under the UK's Packaged Retail and Insurance-based Investment Products (PRIIPs) Regime, derived from the EU PRIIPs Regulation, a short, standardised disclosure document containing the key information about the product being offered – a key information document (KID) – must also be produced and published for investment products marketed to retail investors in the UK. If an investment product will also be marketed to retail investors in the EU, a separate KID prepared in accordance with the EU PRIIPs Regulation must also be produced and published. Since 1 January 2023, changes to both the UK and EU regimes have led to divergence and the UK’s PRIIPs Regime was replaced on 1 January 2024 by the Consumer Composite Investments Regime (see 4.1 Recent Developments and Proposals for Reform).

Private Funds

Investors typically seen investing in private closed-ended funds in the current market include pension funds, sovereign wealth funds, endowments, insurance companies, fund of funds and high net worth individuals.

Listed Funds

Closed-ended listed funds can be marketed broadly and attract both institutional and individual investors.

Private Funds

Limited liability partnerships (LLPs) tend be the most commonly used legal entity for the management entities of private equity and venture capital funds, who are attracted by some of the benefits of the LLP structure, such as flexibility and the fact they are transparent for direct tax purposes and can benefit from national insurance contribution savings.

Listed Funds

The legal structure used for the management entity of listed alternative funds will depend on the jurisdiction in which the manager is based. The most common structure seen is a corporate vehicle.

Other than general marketing/financial promotion rules in the UK, there are no restrictions under UK legislation on the type of parties that can invest in a fund. However, in practice, REITs seek to prevent certain corporate investors from holding interests of 10% or more due to the adverse tax consequences that would otherwise arise.

Both open and closed-ended funds in the UK will almost certainly be AIFs for the purposes of the UK AIFM Regime. As such, the AIF's manager will be an AIFM and will need to be authorised to carry out AIF management in respect of that vehicle. Any person who carries on the activity of managing an AIF in the UK without being duly authorised, and in the absence of an exemption, commits an offence. In addition, if they have entered into an agreement with another person (eg, an investor) in the course of that activity, this agreement is unenforceable against that other party, who is entitled to receive their money back, and to compensation for any loss.

An ITC or REIT could be self-managed or managed by an external manager. The board of an externally managed ITC/REIT will generally consist of non-executive directors, the majority of whom must be independent of the investment manager. In many cases, ITCs and REITs now have no manager representative on the board, due to the unpopularity of such arrangement with investors.

The UK AIFM Regime sets out various provisions relating to service providers, such as depositaries and valuers. Neither the UK AIFM Regime nor any other UK legislation restricts the use of non-UK service providers to provide these services.

However, one restriction does apply in the UK in respect of external valuers: UK legislation prohibits an external valuer from delegating valuation to a third party.

Under the AIFMD, the depositary of an AIF must be established in the home member state of that AIF. Therefore, EU AIFs are no longer able to use UK banks as depositories post-Brexit, and UK AIFs are no longer able to use EU banks as depositaries.

FCA authorisation is always required to manage a UK AIF, irrespective of the location of the manager.

Any firm applying for authorisation or registration by the FCA must have its head office in the UK. Although the FCA will judge each application on a case-by-case basis, the key issue in identifying the head office of a firm is the location of its central management and control.

Three types of licence are available to an AIFM that has its head office in the UK:

  • authorisation under the Financial Services and Markets Act 2000 (FSMA) as a full-scope UK AIFM;
  • authorisation under the FSMA as a small authorised UK AIFM; and
  • registration as a small registered UK AIFM.

The type of licence that is available to the manager will depend on the total amount of assets it has under management and the nature of the AIFs managed.

The UK has not introduced equivalent legislation to that set out in the EU's Directive and Regulation on the cross-border distribution of collective investment undertakings. Although there is no formal concept of pre-marketing, any invitation or inducement to engage in investment activity will constitute a financial promotion for the purposes of the UK domestic regime. Any activity that would involve pre-marketing will therefore involve the issuance of a financial promotion in the UK and will accordingly be restricted by the UK's financial promotion regime.

A number of useful exemptions to the restrictions on making a financial promotion are available under the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the FPO), including the following in particular:

  • the “investment professionals” exemption, which permits financial promotions to be made to, inter alia, firms authorised by the FCA and any person whose ordinary activities involve carrying out the activity to which the communication relates; and
  • the “high net worth entities” exemption, which permits marketing to certain categories of high net worth institutions.

Between them, these exemptions generally allow financial promotions to be made in the institutional markets.

The activity of marketing or promoting securities or other investments is not in itself a regulated activity requiring any form of licence in the UK. However, there are circumstances where someone whose main aim is to make promotions either for their own purposes or on behalf of others (or to help others to make promotions) may, in conjunction with the marketing or promotion, be engaged in regulated activities. In this regard, the most likely regulated activities under the Regulated Activities Order are those of “arranging deals in investments” or “advising on investments”. A firm will require authorisation, with specific permission for the relevant activity, to the extent that it is deemed to carry on such activities in the UK.

In practice, marketing activities in relation to a fund will also often involve the regulated activities of making arrangements with a view to another person buying or subscribing for interests in the fund. In view of this, fund marketing activities in the UK are generally conducted only by authorised persons. Any person conducting marketing activities in relation to a fund should consider whether authorisation is required and, if it is authorised, whether it has the appropriate permissions from the FCA to undertake these activities.

The promotion of an interest in an unregulated collective investment scheme (such as a limited partnership interest) is restricted in the UK. Such a scheme cannot be promoted to the general public and, even for a private placement, there are broad restrictions on its promotion to different categories of recipients. The persons to which a limited partnership interest can be promoted include:

  • investment professional organisations;
  • high net worth organisations; and
  • in limited circumstances, some certified high net worth individuals and sophisticated individuals.

In the UK, the FCA permits the marketing of a private fund to a wider group of recipients than the category of “professional investors” referred to in the AIFMD if the financial promotion rules referred to above are complied with throughout the entire marketing process.

Under the UK's national private placement regime (NPPR) for AIFs, the following notification requirements need to be satisfied:

  • the AIFM must submit a notification to the FCA using the FCA's online system, Connect; and
  • appropriate pre-investment disclosures need to be made in accordance with the provisions of the UK AIFM Regime.

There is a fee for AIFMs making a notification. Marketing can commence once the FCA has received the notification.

Non-UK AIFMs marketing in the UK under the NPPR must report transparency information to the FCA using the Gabriel system.

The two main investor categories in relation to the distribution of funds in the UK are “professional investors” and “retail investors”. A “professional investor” is one who is considered to be a “professional client” (ie, a “per se professional client” or an “elective professional client”, in each case within the meaning of MiFID).

An investor will be a “per se professional client” if it fulfils one of a number of objective criteria listed in MiFID. Such entities include regulated financial entities, large undertakings, governments and public bodies, and investors whose main activity is to invest in financial instruments.

Any investor that does not satisfy any of the “per se” criteria in MiFID will be categorised as a “retail client”, unless it can be treated as an “elective professional client”. To be able to do this, the manager must assess the expertise, experience and knowledge of the investor and whether this makes them capable of making their own investment decisions and understanding the risks involved (the “qualitative test”). The investor must further pass the “quantitative test”, meaning that they have satisfied two out of the three following requirements:

  • having carried out transactions of a significant size on the relevant market at an average frequency of ten per quarter over the previous four quarters;
  • having a financial instrument portfolio exceeding EUR500,000; and
  • working or having worked in the financial sector for at least one year in a professional position.

An investor satisfying the relevant qualitative and quantitative tests and wishing to opt-up must be given a clear written warning of the protections and investor compensation rights they may lose, and they must state in writing that they are aware of the consequences of losing these protections and wish to be treated as a “professional client”.

Private open and closed-ended funds tend only to be marketed to non-retail investors. Listed closed-ended funds are available to both professional and retail investors.

The FCA is regarded as being co-operative, and regularly publishes guidance on relevant regulatory matters.

An FCA-authorised manager must comply with the applicable FCA rules, which have been supplemented by the requirements of the UK AIFM Regime. A key requirement is that the manager must maintain a minimum amount of capital. The amount of capital is likely to be greater if the manager operates under the UK AIFM Regime or the EU MiFID. Other requirements applicable to the typical manager in this structure include:

  • prudential requirements, including relating to its governance, the remuneration of key staff, and internal systems and controls;
  • FCA approvals of personnel in key positions;
  • requirements relating to the conduct of the manager's business, including relating to disclosures to investors and the regulator; and
  • anti-money laundering checks, including due diligence checks on new investors.

The FCA-authorised manager must comply with the rules set out above and, to the extent that the UK AIFM Regime applies, must also ensure that certain requirements are met by the fund, such as:

  • the appointment of a depositary to have custody of certain assets and/or verify title to privately held assets;
  • adherence to organisational controls (relating to risk management, compliance and valuation, for example) and conduct of business rules (relating to due diligence, execution of orders and reporting, for example); and
  • compliance with rules relating to companies in which the fund has a substantial stake.

The fund finance market in the UK is sophisticated and well developed, particularly for closed-ended private funds. The market includes a range of lenders, from banks to specialist debt funds, which offer finance solutions to funds and their GPs/managers. The most common product is a capital call facility, allowing the fund to draw money from the lender in anticipation of making a capital call from the fund's investors. The main advantage of this type of facility is that it will allow quick and efficient access to capital.

The fund documents (eg, the limited partnership agreement) will normally require at least ten business days' notice to be given to the investors prior to the date of any capital call, whereas the lender under a capital call facility will allow the money to be drawn on shorter notice. This type of arrangement therefore gives the GP/manager greater certainty of funding, particularly when the fund needs capital for investment purposes. It also allows the GP/manager to smooth out when capital calls are made to investors because the fund is able to make use of the facility for irregular cash requirements, such as fees and expenses.

Other types of fund finance have been developed in addition to capital call facilities, including:

  • net asset value (NAV) facilities secured on the underlying assets of the fund;
  • fund finance arrangements to unlock liquidity for investors; and
  • facilities targeted at GPs/managers to assist team members to participate in any “GP commitment” requirements.

Despite the developments in the market, the general principle for closed-ended private funds in the UK is that investors will not want the fund to be leveraged. This is particularly the case for a private equity fund because the investment strategy of the fund itself normally includes leveraged buyouts, so investors will not want a double layer of leverage (ie, at both the fund level and the investment level). Therefore, the limited partnership agreement in a closed-ended private fund will normally impose restrictions on the amount of leverage that may be incurred by the fund (for example, the lower of 20% of commitments made by investors and the amount of uncalled commitments), and any borrowing incurred must be on a “short-term” basis.

Furthermore, under the AIFMD, any fund that incurs leverage (short-term borrowing is excluded for these purposes) is subject to additional disclosure requirements, and the AIFM is required to observe a higher degree of regulation. As a consequence, it is important for common forms of fund finance (eg, capital call facilities) to adhere to both the investor-imposed and regulatory-imposed requirements.

It would be usual for the lender of a capital call facility to take some form of security. A common approach would be for the lender to have the right to require the GP/manager to drawdown from investors to pay any outstanding indebtedness under the facility. It is even possible for the lender to step into the shoes of the GP/manager and issue drawdown notices directly to the investors. For this to be possible, the lender must be assigned the right to issue these drawdown notices under the limited partnership agreement of the closed-ended private fund. This can give rise to negotiation with investors as to whether they are required to counter-sign security documents. A possible compromise is that the investor signs an acknowledgment that the right to drawdown has been assigned to the lender without the investor being a direct party to the security arrangements. An additional issue is whether the fund or investors are required to provide information to lenders. As a general rule, investors will not want to provide non-public information.


Different tax regimes apply to the different forms of UK investment fund. These are complex, and a detailed summary of them is beyond the scope of this chapter, but a high-level overview of some of the key direct tax features of common UK fund structures (at both fund and investor level) is set out here for AIFs and under 3.6 Tax Regime. Please note that the features described are necessarily general and may not apply in certain cases – eg, depending on the assets held by the fund or the circumstances of particular investors.

As a general point, the tax structuring preference of an investor will depend on its particular identity and the asset class or classes in which the fund invests. Many funds will have a wide mix of different types of investors (eg, UK resident corporates – such as life assurance companies – and individuals, sovereign wealth funds and pension funds). Fund managers will then usually look to structure the fund so as to be tax efficient for the investor base as a whole rather than a particular investor or class of investor (unless, of course, a particular investor or class is especially important or has been specifically targeted).

A key issue for all investors will typically be tax neutrality when investing through a fund (wherever that fund is established) – ie, they will not want that investment to leave them in a worse tax position than they would be in if they directly held the underlying assets instead. Investors will also commonly not want to be subject to tax filing obligations in new jurisdictions solely because of their investment in the fund, or, if that is not possible, they will commonly want to be made aware of the relevant filing obligations by the fund manager. Another factor for investors when investing in funds (wherever the funds are located) is a wish to minimise withholding taxes on their returns from the fund, due, if nothing else, to the administrative and cashflow cost.

From a UK tax perspective, a further important issue will be whether the fund would be considered to be trading. This can be relevant at both fund and investor level, as the tax privileges for certain UK fund types and investor classes do not extend to trading profits (eg, UK-registered pension schemes are generally exempt from tax on their investment income and capital profits but this exemption does not apply to trading profits). This can have an impact on the chosen structure. Similar concerns can arise for investors in other jurisdictions.

Private Closed-Ended Funds Structured as English Limited Partnerships

Tax position of the fund and investors

As mentioned in 2.1.1 Fund Structures, the typical structure of a UK private equity or venture capital fund is the English limited partnership. These are transparent for UK direct tax purposes, which means that each limited partner is subject to tax on the income and gains allocated to it under the limited partnership agreement (whether they are distributed or not), rather than the limited partnership itself being taxable on its income and gains.

The taxation of investors on their share of the limited partnership's income and gains depends on the nature of the underlying return that the partnership has received (eg, capital gain, interest, rent or dividend) and the investor's own tax status.

English limited partnerships typically make payments to limited partners in the form of repayment of the loan element of the limited partners' partnership contribution and distribution of partnership profits. No UK withholding taxes should apply to such payments.

Listed Closed-Ended Funds – ITCs

Tax position of the fund

Companies with ITC status are subject to UK corporation tax, but (if certain conditions are met) are exempt from tax on capital gains and on profits of a capital nature from their derivative contracts and their creditor loan relationships. ITCs are also able to benefit from an elective interest streaming regime, which allows them to treat certain dividends to investors as interest distributions, enabling the ITC to claim a corporation tax deduction in respect of the interest distribution (if certain conditions are met). As a UK company, an ITC can also potentially benefit from the general UK company exemption from tax on dividends and other distributions received.

No withholding tax should apply to dividends paid to investors by ITCs, including interest distributions if the ITC enters into the elective interest streaming regime mentioned above.

Tax position of the investor

Investors in an ITC will be taxed on distributions (other than interest distributions) from an ITC in the same way as dividends from normal companies. Therefore, UK tax resident individuals will be subject to income tax, at rates of up to 39.35%, and corporation taxpayers can potentially benefit from the general UK company exemption from tax on dividends.

Interest distributions are, broadly, treated as interest receipts, so UK resident individuals will be subject to income tax (at rates of up to 45%), and corporation taxpayers will treat such distributions as if they were interest receipts under a loan relationship under the corporate loan relationship rules.

Listed Closed-Ended Funds – REITs

Tax position of the fund

A REIT is tax opaque but, if certain conditions are met, benefits from an exemption from UK tax on profits and gains from its property rental business (PRB). Conditions with which a REIT must comply include that, broadly, at least 75% of its profits must come from its PRB, at least 75% of the total value of its assets must relate to its PRB, and it must distribute at least 90% of its PRB income within 12 months of the end of the accounting period in which it arose. There is no requirement for a REIT to distribute capital gains. Other detailed REIT conditions apply in the tax legislation, which also need to be considered.

Distributions by REITs in respect of the profits and gains of their PRB are known as property income distributions (PIDs) and should be paid subject to withholding tax at the basic rate (20%), unless an exemption applies (eg, if the REIT has a reasonable belief that the person beneficially entitled to the payment is a company that is resident in the UK for corporation tax purposes).

REITs are subject to corporation tax in the usual way on any non-PRB profits (eg, trading profits). These can be paid out as dividends, without withholding tax.

Tax position of the investor

For corporation tax and income taxpayers, PIDs are generally treated as UK property income (ie, they are not treated as normal company distributions), so UK resident individuals are subject to income tax on them (at rates of up to 45%), and credit should be given for any tax withheld on payment of the PID by the REIT. Corporation taxpayers will treat them as taxable income. Depending on its particular circumstances, a non-resident investor may be able to reclaim under a double tax treaty all or part of any tax withheld from PIDs paid to it.

Other distributions of profits by REITs are taxed as dividends in the normal way. Therefore, UK tax resident individuals will be subject to income tax at rates of up to 39.35%, and corporation taxpayers can potentially benefit from the general UK company exemption from tax on dividends.

An OEIC can be used for an open-ended retail fund, which is a collective investment scheme structured as a corporate vehicle. Different authorisations apply, depending upon the investments to be made. For example, OEICs that invest in real estate may be structured as PAIFs, provided the relevant conditions are met. For an open-ended structure, an AUT can also be used. This is a type of unit trust authorised by the FCA, which is constituted by a trust deed made between the trustee and the manager of the fund. The property of the AUT is legally held by the trustee but managed by the manager. The investors have beneficial ownership of the property of the fund. Many PAIFs have an AUT as a feeder vehicle to enable corporate investors wishing to hold 10% or more indirectly to invest without infringing regulatory requirements.

In 2013, two new types of tax transparent funds (ACSs) were introduced in the UK. These new types of authorised funds can take the form of a partnership or a co-ownership scheme. In practice, the co-ownership scheme has proved more popular, particularly from a tax perspective. However, ACSs are only suitable for use by institutional investors, with investment restricted either to investments of a minimum of GBP1 million or to professional institutional investors.

Compared to AIFs (which fall within the scope of the UK AIFM Regime), retail funds structured as open-ended funds can be easier and cheaper to set up, notwithstanding the fact that the fund itself requires prior regulatory authorisation. Open-ended funds have their own constitutional documentation, depending on which type of vehicle is being set up, as follows:

  • a trust deed in the case of an AUT;
  • an instrument of incorporation in the case of an OEIC; and
  • a co-ownership or partnership deed in the case of an ACS.

In each case, the documents set out the features, powers and rules governing each authorised fund. For both UCITS and NURS funds, however structured, there are very detailed operational requirements. Day-to-day operations are detailed in the fund's prospectus.

OEICs in the UK can be structured as a single fund or as an umbrella company with multiple sub-funds, each of which would have its own investment aims and objectives. The legal framework in the UK provides for the ring-fencing of the assets and liabilities of each sub-fund.

An AUT can have a single fund or an umbrella fund structure. In the latter case, each sub-fund is constituted under a separate trust, and the assets and liabilities of each sub-fund are ring-fenced under UK law.

Certain pre-investment disclosures must be made to investors. Under UK regulation, every manager is required to provide comprehensive information to help investors make a balanced and informed decision about any retail fund prior to investing. In most cases, this information is contained within the prospectus. Investors in open-ended funds must have access to an up-to-date prospectus at all times.

In addition, a KID must be prepared and made available to potential investors under the UCITS Directive (the UCITS KID). The UCITS KID requirements differ from those for the document that has to be produced under the PRIIPs Regulation. For example, the UCITS KID must be provided to all potential investors, not just those in the EEA; it must also be provided to both potential retail and professional investors, whereas the PRIIPs KID is only required to be made available to retail investors.

Open-ended funds, particularly OEICs, are popular with individual investors, insurance companies and pension funds. ACSs are increasingly popular for institutional investments and pension funds.

The new open-ended fund vehicle introduced in the UK in 2021 – the LTAF (see 2.1.1 Fund Structures) – is primarily aimed at defined contribution pension schemes, but is also available to retail clients if they are sophisticated investors or certified high net worth individuals. As a result of an FCA consultation in 2022, the LTAF is now considered as a Restricted Mass Market Instrument and may be distributed to a wider market, including retail investors.

The legal structure used for the management entity of retail funds varies and will depend on a number of factors, such as tax considerations. The most common structure used is a corporate vehicle.

Other than general marketing/financial promotion rules in the UK, there are generally no restrictions under UK legislation on the type of parties that can invest in a retail fund. However, PAIFs cannot have a corporate investor with an interest of 10% or more (but see 3.1.1 Fund Structures in relation to the use of feeder vehicles to address this issue).

The manager of a UCITS or other authorised fund must be authorised by the FCA to carry out this role.

Each open-ended fund must also have a depositary. In the UK, this is a regulated activity for which the depositary must hold the appropriate FCA permissions.

The UK’s authorised fund governance regime goes further than is required under the UCITS Directive in that it places a number of additional responsibilities upon depositaries and requires them to be independent (so as to avoid and manage any potential conflicts of interest).

Depositaries in the UK are also required to undertake a wide variety of oversight activities, and are subject to extensive conduct of business rules and other regulatory requirements.

FCA authorisation is always required to manage a UK authorised fund, irrespective of the location of the manager. UK rules permit a UK authorised fund manager to delegate to an overseas sub-manager, subject to certain requirements being met.

Investment funds must be authorised or recognised by the FCA in order to be promoted to retail investors in the UK. Authorised funds must be established in the UK and take one of the following legal forms:

  • ACS;
  • AUT; or
  • ICVC.

A fund must also be classified, based on a marketing strategy, as either a UCITS, NURS, QIS or LTAF. The application must include the requisite application form, certain relevant supporting documents and information, and an application fee. Application processing times depend on whether the application relates to a NURS or QIS (six months, although the FCA aims to process such applications within two months), a UK UCITS (two months) or an LTAF (six months).

The pre-marketing of retail funds is subject to the financial promotion regime (see 2.3.5 Rules Concerning Pre-marketing of Alternative Funds), which requires financial promotions to be approved by an authorised firm.

A “retail investor” is defined as any investor that does not meet the necessary criteria in MiFID, unless it can be treated as an “elective professional client” (see 2.3.10 Investor Protection Rules).

UCITS and NURS funds can be marketed generally to retail investors in the UK. UK UCITS and NURS funds cannot be marketed to investors living in EU countries, unless the fund is approved by the regulators in each country and complies with the terms for regulated funds in each country.

Although QISs also fall within the UK AIFMD Regime, they may only be marketed to experienced investors who meet certain qualifying conditions.

The ability for EU UCITS to passport into and out of the UK was revoked when the UK withdrew from the EU. The Temporary Marketing Permissions Regime (TMPR) was created to allow EU UCITS that were using their marketing passport in relation to the UK to continue to market to UK retail investors for a limited period.

Schemes domiciled overseas that are not in the TMPR, including those in non-EU countries, can be recognised in the UK under the process set out in Section 272 of the FSMA. This recognition route requires the FCA to undertake an in-depth assessment of the individual scheme and its country’s legislative regime. The FCA must be satisfied that a scheme meets several tests in legislation and affords adequate protection to investors (including an assessment of the suitability of both the operator and depositary). This is a lengthy and time-consuming process.

The Section 272 recognition process has been in place for some time, but given the number of schemes previously passported and already available in the UK, the government determined that a faster recognition route was required than under Section 272 and is in the process of introducing a new Overseas Funds Regime (OFR). This will follow a similar process to Section 272 but with generic equivalence assessments for different overseas fund jurisdictions streamlining the approval process. The FCA anticipates that the OFR should be ready to become operational in 2024.

Authorisation of a UK fund by the FCA as a UCITS or NURS entitles it to be marketed to UK retail investors.

Investment funds must be authorised or recognised by the FCA in order to be promoted to retail investors in the UK (see 3.3.4 Regulatory Approval Process).

Before a fund is made available to retail investors, a KID will need to be drawn up (in English) in the UK in accordance with the UK PRIIPs Regulation (see 3.1.4 Disclosure Requirements). The UK PRIIPs Regulation requires the KID to be updated regularly, and to be updated when the review indicates that changes need to be made.

The FCA introduced a new consumer duty in 2023, designed to provide a higher level of consumer protection in retail financial markets, which includes ongoing requirements in respect of the firm-consumer relationship.

In the UK, there are both legal and regulatory requirements for retail funds to produce periodic reports every six months. Managers must prepare and publish annual and semi-annual reports, and make them available upon request and free of charge.

The FCA has the power to require a manager and/or depositary to compensate an authorised fund in the event of a finding against the manager and/or depositary. It also has the power to fine those entities and to fine or ban individuals in those companies.

In addition, authorised fund management is covered by the Financial Ombudsman Service and the Financial Services Compensation Scheme, which each deal with investor complaints and can require managers to compensate investors in certain circumstances.

See 2.3.11 Approach of the Regulator.

The FCA Handbook sets out stringent requirements as to the operation of authorised retail funds, including that a depositary must be appointed. The fund must also establish and apply remuneration practices and policies, and publish its remuneration policy.

There are also restrictions on authorised retail funds in relation to borrowing and the types of investments such funds can make. NURS have greater flexibility, with differing borrowing and investment restrictions, and are popular for real estate investment through the PAIF structure.

UCITS funds are subject to prescriptive rules on borrowings, as prescribed under the UCITS Directive.

A UCITS is permitted to borrow money for use by the fund, provided it will be repaid out of the scheme property and does not conflict with any restrictions on borrowing that may have been included in the fund’s Instrument of Incorporation. This borrowing is permitted purely on a temporary and infrequent basis, and must not exceed 10% of the total value of the fund’s assets on any day. Prior consent for any borrowing must be obtained from the depositary, or for periods of borrowing that may exceed three months.

The same 10% borrowing limit applies for NURS, but there is no restriction on the length of time for which a NURS may borrow. QISs have the ability to borrow up to 100% of the fund's NAV. Where derivatives are used, a QIS must ensure that its total exposure to derivatives does not exceed its NAV.


See 2.6 Tax Regime (General).

OEICs (Other than PAIFs) and AUTs

Tax position of the fund

OEICs and AUTs are subject to UK corporation tax, but are exempt from tax on chargeable gains from the disposal of assets (provided that the gains do not represent profit on trading transactions). Furthermore, if these funds satisfy the “genuine diversity of ownership” condition (GDO), then certain capital profits from investment transactions should be treated as exempt capital gains. For the GDO to be met, the fund must be sufficiently widely marketed. An LTAF can also be treated as meeting the GDO if at least 70% of its shares or units are held by certain institutional investors (or by the manager of the fund in its capacity as manager). Failure to meet the GDO has wider consequences for QISs and LTAFs, such that, broadly, they are taxed under normal corporation tax rules rather than the (more generous) ones that typically apply to authorised funds.

OEICs and AUTs can also potentially benefit from the general exemption from corporation tax on dividends.

OEICs and AUTs must allocate for distribution as dividends or interest the total amount available for income allocation. An OEIC or AUT can only show an amount as available for distribution as interest if it meets the qualifying investments test (such funds are often called “bond funds”). It meets this test, broadly, if the market value of investments that produce interest (or a return similar to interest) exceeds 60% of the market value of the fund’s total investments. If this test is met, the distribution is generally allowable as a deductible expense for the fund for corporation tax purposes.

The net effect of the tax deduction is that bond funds should typically have little to no tax leakage at the level of the OEIC/AUT. If the qualifying investments test is not met, then all of the income available for distribution must be classed as dividends (and there would be no corresponding deduction for such payments by the fund to the extent interest is included in such distribution). Whether or not any corporation tax will be payable for a fund that does not meet the definition of a bond fund therefore depends on the level of interest income and deductible management expenses. Any corporation tax paid by an OEIC or AUT is not creditable for investors.

No withholding tax should apply to distributions paid to investors by OEICs or AUTs.

Because their income profits are taxable at the basic rate of income tax, OEICs and AUTs are “subject to tax” for double tax treaty purposes. As such, they can benefit from the UK’s extensive network of double tax treaties, which can help reduce withholding taxes in other jurisdictions and assist in claiming credit for foreign taxes incurred on foreign sources of income.

It is possible for OEICs and AUTs to elect to be treated as “tax elected funds”, which would modify the tax treatment relating to OEICs and AUTs from that discussed above. However, in practice, the uptake of this regime has been low, so it is not discussed further here. The regime is most appropriate for funds with a mis of debt and equity investments that do not qualify for bond fund treatment.

Tax position of the investor

UK tax resident individuals will be taxed on dividend distributions in the same way as for dividends they receive from normal companies. Therefore, UK tax resident individuals will be subject to income tax, at rates of up to 39.35%.

However, for UK corporation taxpayers, the normal dividend distribution rules do not apply (ie, that dividends received from a UK corporate are usually tax exempt in the hands of a UK corporate taxpayer). Instead, special anti-avoidance rules need to be considered (called the corporate streaming rules), which are designed to prevent corporate investors using OEIC or AUT structures to convert interest-type income into exempt dividend income. The rules are complicated, but in general terms dividend distributions are streamed into franked and unfranked parts following a formula set out in the legislation. In effect, the aim is to tax corporate investors as if they had invested in the underlying assets of the OEIC or AUT directly.

Interest distributions are, broadly, treated as interest receipts, so UK resident individuals will be subject to income tax (at rates of up to 45%).

Corporation taxpayers are required to treat their units in bond funds as creditor loan relationships for the purposes of the corporation tax rules relating to corporate debt.


Tax position of the fund

As mentioned above, OEICs that invest in real estate can be structured as PAIFs (provided the necessary conditions are met). PAIFs are subject to a significantly modified version of the OEIC tax regime described above. An important extra benefit of the PAIF status is that, broadly, a PAIF (unlike a normal OEIC) is exempt from corporation tax on the net income of its property investment business.

Special streaming rules apply to PAIFs. Broadly, the total amount available for income allocation by a PAIF must be split into three pools comprising property income distributions, interest distributions and dividend distributions. Interest distributions should be deductible expenses for the PAIF when calculating the net income of the non-tax exempt part of its business.

Payments of property income distributions are subject to withholding tax (currently at 20%), unless an exemption applies (for example, if the PAIF has a reasonable belief that the person beneficially entitled to the payment is a UK tax resident company). Depending on its particular circumstances, a non-UK resident investor may be able to reclaim under a double tax treaty all or part of any tax withheld from property income distributions paid to it. No withholding tax should apply to payments of interest or dividend distributions.

Tax position of the investor

In relation to PAIFs, broadly, for recipients, property income distributions are taxed as profits of a UK property business, so UK resident individuals are subject to income tax on them (at rates of up to 45%), and credit should be given for tax withheld on payment of the PID. Corporation taxpayers will treat them as taxable income.

Interest distributions are, broadly, treated as interest receipts, so UK resident individuals will be subject to income tax (at rates of up to 45%), and corporation taxpayers will treat them as taxable income under the loan relationship rules.

Dividend distributions are taxed as dividends on shares in the normal way. Therefore, UK tax resident individuals will be subject to income tax, at rates of up to 39.35%, and corporation taxpayers can potentially benefit from the general UK company exemption from tax on dividends.


Tax position of the fund

ACSs can take the form of either co-ownership schemes (CoACSs) or limited partnerships. However, the tax discussion in this chapter is confined to CoACSs, which is the more common ACS structure.

A CoACS is not subject to tax in the UK as it is not a body corporate and has no legal personality.

Distributions to investors from CoACSs should generally not be subject to withholding tax (although withholding may be required if a CoACS has UK property income and non-UK resident investors).

Tax position of the investor

From the perspective of a UK investor, CoACSs are transparent with respect to income from a tax perspective but are treated as opaque with respect to the taxation of capital gains.

For the purposes of tax on income, investors in a CoACS are therefore treated as if they directly received the income arising from its assets. Accordingly, the tax treatment of an investor in relation to such income will depend on the investor's own tax position.

For capital gains purposes, an investor's interest in the underlying assets of the CoACS is disregarded and instead its holding of units in the scheme is treated as an asset. This simplifies the computation of the participant’s chargeable gains or losses as they are regarded as having a single asset rather than many separate assets, and they can only incur a chargeable gain or loss on a disposal of their interest in the fund. The rules for computing chargeable gains and losses generally operate in the normal way, as they would for shares and securities.

Following the end of the Brexit transition period, the UK government has placed considerable emphasis on the potential opportunities it sees to create what it hopes will be a more competitive financial services sector post-Brexit, while preserving high regulatory standards tailored to the UK's needs. There were substantive developments in this area in 2022 and 2023.

In April 2022, the UK introduced a competitive new tax regime for qualifying asset holding companies (the UK QAHC Regime). The QAHC Regime is an elective tax-privileged regime available to certain UK resident asset holding companies that are owned by funds or institutional investment structures in order to hold investment assets. The main focus of the regime is on alternative fund structures, which are typically closed-ended, non-retail funds that hold assets across a range of private market investment strategies – chiefly credit, private equity and real estate investments. The QAHC Regime is designed to improve the competitiveness of the UK as a location for asset holding companies by better enabling the tax-efficient flow of income and gains from the underlying investments back through the fund structure to investors so that, for UK tax purposes, investors are broadly taxed as if they had directly invested in the underlying assets with the QAHC paying tax only on a small transfer-priced margin to reflect the activities that it performs. For non-UK fund structures, a UK QAHC has the advantage that substance (which is becoming increasingly important) can easily be achieved where the investment management team is in the UK.

In broad terms, in order to qualify as a QAHC a company needs to be at least 70% owned by:

  • qualifying investment funds – ie, funds that:
    1. are widely held;
    2. are closely held but held by certain categories of institutional investors (such as most pension funds); or
    3. meet a diversity of ownership condition; or
  • certain institutional investors directly.

There is also a requirement that the QAHC does not carry out trading activities.

On 27 April 2023, the UK government published a consultation seeking views on the potential introduction, scope and design of a tax regime for a new type of unauthorised contractual scheme fund structure, referred to as a reserved investor fund (contractual scheme) (RIF). As an unauthorised contractual scheme, the RIF would be a collective investment scheme under the FSMA. Under the UK’s regulatory regime, the manager of an AIF – in this instance a RIF – must be authorised by the FCA as a full-scope UK AIFM or a small-authorised UK AIFM, or must be registered with the FCA as a small-registered UK AIFM. The consultation closed on 9 June 2023.

On 29 June 2023, the Financial Services and Markets Act 2023 (FSMA 2023) was enacted. Among other things, the FSMA 2023 is intended to implement the findings of HM Treasury’s Future Regulatory Framework (FRF) Review. Launched in light of Brexit, the FRF Review was described by UK Finance as “a once in a generation assessment of the legislative framework in which the financial services regulators operate”. The changes implemented by the FSMA 2023 will involve the revocation of the huge body of EU law that the UK essentially inherited when it left the EU, to be replaced by domestic rules. The provisions will come into force over several years on dates appointed by HM Treasury in statutory instruments.

Reform proposals designed to re-energise capital markets were also published in 2022. In July 2022, HM Treasury published the outcome of the UK Secondary Capital Raising Review, which followed on from the 2021 Lord Hill review recommendations and subsequent call for evidence and looked at ways in which to improve the secondary fundraising process for UK listed companies so that it is cheaper, quicker and more efficient. As of November 2023, the government has accepted all the recommendations addressed to it and is considering how to take the proposals forward.

In December 2022, the UK Chancellor of the Exchequer announced a series of wide-ranging reforms to the financial services sector in the UK, to take effect over the next few years (referred to as the Edinburgh Reforms), which include the legislation and regulation relevant to alternative funds, retail funds and their managers. Key measures announced include the repeal of the UK PRIIPs Regime; draft legislation was proposed on 22 November 2023.

Finally, on 26 October 2023, certain proposed amendments to the LP Act 1907 were published, by way of the Economic Crime and Corporate Transparency Act 2023 (ECCTA 2023). ECCTA 2023 implements a number of changes to the legislation on limited partnerships and creates new offences and penalties, including criminal sanctions, against the partners of limited partnerships in certain circumstances. The key changes include:

  • requiring more information about the partners to be filed, including on individual limited partners (although it will not all be publicly available), and controls on who can file the information by requiring certain filings to be made by an authorised corporate service provider (which is subject to anti-money laundering regulations);
  • requiring limited partnerships, both new and existing, to have a firmer connection to the part of the UK in which they are registered (by having to maintain its registered office there, as distinct from its principal place of business);
  • requiring all UK limited partnerships (not just Scottish limited partnerships) to file confirmation statements confirming that the information held about them on the register is correct; and
  • enabling the deregistration of a limited partnership in certain circumstances.
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Dechert LLP is a global law firm with 21 locations across the US, Europe, the Middle East and Asia. It has one of the largest investment fund practices in the world, with a record of innovation stretching back 40 years. It advises across the full range of mainstream and alternative asset classes and strategies, representing some of the world’s largest fund complexes. The asset management practice has dedicated lawyers across 17 offices and operates as a single practice group across the globe with no internal barriers to collaboration. Clients look to the team for support across the entire fund lifecycle, from development and formation to marketing, operations and transactions. It provides advice related to fund management and governance, and assists with the full range of regulatory and compliance issues, as well as investigations and litigation involving regulatory entities around the world.

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