We speak of two interests of the bourgeoisie, for large landed property, despite its feudal coquetry and pride of race, has been rendered thoroughly bourgeois by the development of modern society. Thus the Tories in England long imagined that they were enthusiastic about monarchy, the church, and the beauties of the old English Constitution, until the day of danger wrung from them the confession that they are enthusiastic only about ground rent.
The Eighteenth Brumaire of Louis Bonaparte, Karl Marx, 1852

We hope that you enjoyed our opening quote, at a time when both the old English Constitution and ground rent are highly topical. The former is covered in our historical trivia at the end of this newsletter, which on this occasion brings together Joe Biden, Magna Carta and how to use it to get cheap beer but why it also caused the death of John’s ancestor in the Scottish First War of Independence. On ground rent, Robert Jenrick, Secretary of State for Housing, Communities and Local Government, announced on 7th January that the Government is proceeding with reform of leasehold enfranchisement and the introduction of commonhold, as proposed in the Law Commission proposals last year. There is, as yet, no detail as to what is to be introduced or a timetable. We will be watching out for news.

Our main news item this edition is the long-awaited publication by HM Treasury of the Review of the UK funds regime: a call for input. Our comments on this are below, followed by a lot of our usual topics.

UK funds review

HM Treasury has just published a call for input for its review of the UK funds regime. This review was announced in the Budget in March 2020 as part of a broader initiative to make the UK asset management industry more competitive. The first element of this, which was published in March 2020, was in respect of the tax treatment of asset holding companies (AHCs) in alternative fund structures. This is an ongoing process, with the second phase of consultation running until 23rd February. We comment below on the new call for input and provide a brief update on the AHC consultation. 

Review of the UK funds regime: a call for input

The call for input can be found here.

It sets out that the overarching objective of the review is to identify options which will make the UK a more attractive location to set up, manage and administer funds, and which will support a wider range of more efficient investments better suited to investors’ needs”.  The proposals are divided into three areas:

  • The UK's approach to funds taxation
  • The UK's approach to funds regulation
  • Opportunities for wider reform
The chapter on the UK's approach to funds taxation covers a number of areas:
  • A review of recent funds tax reforms and a request for feedback as to how effective they were in achieving their aims;
  • Some possible reforms to the taxation of funds, none of which are particularly relevant to real estate funds;
  • Tax changes for REITs. The review refers to the broader possible changes to the REIT regime already flagged in the AHC review, including considering relaxation of the listing requirement, changes to how the close company test is applied, the application of the holders of excessive rights rules and how the ’balance of business’ test operates. The review also outlines some possible, more technical changes to the REIT tax rules:
    • the interest cover test at s543 of the Corporation Tax Act (CTA) 2010 creates a charge where the required ratio is not met. Larger REITs are now also subject to the Corporate Interest Restriction, which applies where a group or company has net interest and other financing costs of over £2 million. The review notes that it has been suggested that it is burdensome having both tests and that the interest cover test may no longer be necessary. 
    • the 3-year development rule at s556 CTA was introduced to remove the need to consider intention when REITs dispose of property shortly after significant development work. The review notes that it has been suggested that the rule should be amended to bring it up to date with current practices and the commercial environment.
    • the REIT rules require a company to hold at least 3 properties. It has been suggested that if a REIT were able to hold a single property this would make the UK regime more attractive to investors. 
    • under the current rules, where a REIT holds overseas property in a UK company it is likely to suffer tax in the overseas jurisdiction as well as UK tax withheld paying the property income distribution to investors. This acts as a barrier to REITs holding overseas property in a UK company. It has been suggested that amendment of the rules to remove this barrier will make the UK REIT regime more attractive to investors wishing to hold property across wide geographical areas.
  • Changes to the VAT treatment of fund management fees. This had been flagged in the Budget announcements last year and may be the subject of a future, specific consultation;
  • A request for feedback on features of the UK’s double tax treaty network that might be enhanced for the benefit of funds;
  • The treatment of AHCs. The review flags up the separate consultation. See below for more details;
  • The treatment of limited partnership funds (LP Funds). The paper asks what are the barriers to the use of UK-domiciled LP Funds and Private Fund Limited Partnerships (PFLPs)?
The chapter on the UK's approach to funds regulation also covers a number of areas:
  • The review of current regulation flags a a number of recent and ongoing areas of work relevant to real estate funds, all of which we have covered in detail in this newsletter in recent years:
    • changes to the FCA rules on permitted links, introduced in 2020, which determine what types of assets unit-linked products, often used for pensions contributions, can invest in. These changes sought to allow more investment in a wider range of illiquid assets if conditions providing enhanced investor protection were met. This is something on which John had been lobbying since 2012, so we were delighted when it finally happened;
    • new rules for Non-UCITS Retail Schemes (NURSs) investing in illiquid assets such as property, aiming to make their liquidity management more transparent and predictable, introduced in 2020;
    • the Financial Policy Committee joint review of ’liquidity mismatch’ in open-ended funds, which the FCA and the Bank of England are currently undertaking. This joint work is exploring how the redemption terms of open-ended funds might better align with the liquidity of their assets in order to enhance financial stability and promote funds’ ability to invest in illiquid investments, helping to increase the supply of productive finance to the economy through the business and financial cycles;
    • the Productive Finance Working Group, co-sponsored by HM Treasury, the Bank of England and the FCA, specifically looking at how to channel capital into long term productive investment. 
    • the FCA’s consultation CP20/15 ’Liquidity mismatch in authorised open-ended property funds’, which proposed the introduction of notice periods for daily-dealing property funds and recently closed. This is a subject that we have been covering in detail. 
  • Feedback on fund authorisation:
    • Benefits;
    • Speed to market;
  • Possible changes to the Qualified Investor Scheme (QIS). Although these points are covered in the regulatory chapter, they really need to be considered in the context of the more fundamental changes set out in the subsequent chapter as they raise existential questions about the purpose of the QIS. The paper recognises this.
  • The UK Funds Regime Working Group report put forward a proposal for an optional ‘Direct2Fund’ investor dealing model. 
The final chapter on opportunities for wider reform is the most interesting, particularly the parts relating to potential new fund vehicles. This covers two areas:
  • Following proposals from the Investment Association, the UK Funds Regime Working Group report set out recommendations to establish a Long-Term Asset Fund (LTAF). We have covered this previously in our newsletter. It is intended to facilitate long term investment in illiquid assets by defined contribution (DC) pension schemes, a topic that we have also covered. There is more on DC pension schemes later in this newsletter on the Pension Schemes Bill.
  • The development of a new fund structure which the review notes that the Alternative Investment Management Association have proposed this could be structured as either a corporate or as a ’partnership’ and which the Association of Real Estate Funds, supported by the UK Funds Regime Working Group, has also suggested that it could be structured as a contractual scheme (the Professional Investor Fund or PIF). Both proposals are supported by the UK Funds Regime Working Group. We do not think that these are mutually exclusive and we can see benefits of having UK equivalents of both the Luxembourg SICAV and FCP. We will responding accordingly.
The paper covers some other interesting thoughts in this area:
  • Because fund administrators can be, and in many cases already are, based outside London, growing the asset management industry can become part of the "levelling-up” agenda;
  • Potential changes to rules for authorised funds (and presumably others that follow the IMA SORP) to make distributions out of capital;
  • Possible changes to the rules for investment trusts.
The review ends with the invitingly open question, "are there other things government should consider as part of this review of the UK funds regime, or proposals for enhancements to the UK funds regime which the government has not included in this call for input? If so, how important are they and how would you like to see them prioritised in relation to the proposals explored in this call for input?"

Melville Rodrigues, who has been the main proponent of the PIF, has some more information about it on his shiny new website, which you can find
here. In the face of consultant website competition, we had hoped to apply some fresh lipstick and rouge to our own. Unfortunately our website provider is in the midst of a major upgrade following the end of Adobe Flash Player so that will have to wait….

There will be an AREF / IPF / INREV webinar on this on 23rd March. Watch on their websites in due course for details.

The Tax Treatment of Asset Holding Companies in Alternative Fund Structures: Government response and second stage consultation

As covered in our previous  newsletter, it is proposed to bring forward two broad sets of changes:
a) The establishment of a new regime for AHCs. "This will aim to deliver an appropriately targeted, proportionate and internationally competitive tax regime for AHCs that will remove barriers to the establishment of these companies in the UK”.
b) To introduce "changes to the UK’s existing Real Estate Investment Trust (REIT) regime, to better allow UK REITs to serve as AHCs for investment in real estate.”

John is participating in the consultations on behalf of the Investment Property Forum (IPF) and is also part of the Association of Real Estate Funds (AREF) response. As with the first round consultation, the IPF is concentrating on the more commercial and practical aspects and leaving the tax technical heavy lifting to the AREF Tax Committee. Although formal responses to the consultation are required by 23rd February, HMT and HMRC have been conducting extensive online meetings with interested parties from the first round consultation, each covering different aspects of the proposed regime. These have concentrated on a) above, and as mentioned, further details on the proposed changes to the REIT regime have now been included in the new call for input.


We set out our views on the status of financial services in the post Brexit agreements with the EU in a blog that we published on Boxing Day. You can find it here. Developments since our previous newsletter on 4th January have only reinforced our views on this. In particular:
  • Mairead McGuinness, who took over as the European Commissioner for Financial Stability, Financial Services and the Capital Markets Union in October 2020, has made it clear in a number of comments over the last couple of weeks that the MoU by the end of March will only set out in broad terms how the UK and the EU will establish their relationship in financial services. Decisions on equivalence will take place after that, but the EU has no fixed deadline for achieving this. She also reminded everyone that the UK has chosen to leave the single market and whatever equivalence decision is reached, the UK will not get the same access to the single market going forward.
  • The European Securities and Markets Authority (ESMA) issued a statement warning UK firms about using reverse solicitation in an attempt to circumvent market access restrictions post Brexit. You can find it here.
John’s  Boxing Day Brexit blog was quoted extensively in an article in CoStar on 4th January. You can find it here.

Well done to the eagle-eyed who spotted that in our Brexit update in our previous newsletter we spelt Mark François’ surname the French way with a c-cedilla. This was entirely intentional. Although he is unlikely to ever read our newsletter, the knowledge that it would send him apoplectically angry if he did is enough to bring a little joy into our lives in these difficult times. 

A couple of other EU matters are covered below, the AIFMD consultation and the ELTIF consultation.

AIFMD consultation

We have been covering in this newsletter the EU consultation on the Alternative Investment Fund Managers Directive (AIFMD). John was part of the team that drafted the Association of Real Estate Funds (AREF) response, which was submitted last week. If you would like more details, please let us know. John also contributed to the Investment Property Forum (IPF) and Commercial Real Estate Finance Council (CREFC) submissions. 

ELTIF consultation

We covered this in our previous newsletter (see here). The EU unexpectedly extended the submission deadline from 19th January to 1st February, but as this too has now passed, this is not a particularly helpful update for you.

In a slightly unexpected development (or at least unexpected to us), ESMA yesterday wrote an extensive letter to the Commission with its thoughts. You can find it

The mini-bond scandal

We covered this in our previous newsletter, and indeed before that. There have been two further developments since our newsletter on 4th January:

  • Another “interesting” property company funded by loans issued to individual investors, Magna Global, appears to have gone bust, losing people their life savings. Whilst the business appears to have been unable to complete any successful property investments, the two owners did reward themselves with very nice sports cars;
  • Bank of England Governor Andrew Bailey has sustained further heavy shelling. In our previous newsletter, we mentioned the publication of Dame Elizabeth Gloster's Report of the Independent Investigation into the Financial Conduct Authority’s Regulation of London Capital & Finance plc. This investigation report is a damning indictment of FCA failure over its supervision of LCF and of the mini-bond market more generally. Bailey who was at the time chief executive of the FCA came in for particular criticism. On 1st February, Gloster appeared before the Treasury Select Committee. Not only was she more critical of Bailey’s behaviour than she had been in the report, she also told MPs that Bailey had tried to have his name removed from the report. A recording of the Treasury Committee can be found here. Bailey is due to appear before the committee next week, 8th February, 3.30pm, coverage live on Make sure you have a big bucket of popcorn.

Pension Schemes Bill

We have been covering the glacial pace of proposals to establish UK Collective Defined Contribution Pension Schemes since originally announced by George Osborne in the 2014 Budget. You can read our blog about it here, written in January 2020 when the Pensions Bill was reintroduced after running out of time before the 2019 General Election. It then got pushed to one side due to covid. It finally passed its third reading in the House of Commons last November, having started in the House of Lords. Consideration of House of Commons amendments to the Bill took place in the House of Lords on 19th January 2021. Both Houses agreed on the text of the Bill which now waits for the final stage of Royal Assent when the Bill will become an Act of Parliament. Royal Assent is yet to be scheduled. We will write more on this after Royal Assent.

You can find our general materials on designing funds for DC pension schemes

Development Securities tax case

In further bad news for U+I (formerly Development Securities plc), in December HMRC won the latest and possibly final round of the Development Securities tax case, Development Securities v HMRC [2020] EWCA Civ 1705 (see here). This case has been working its way through the courts for several years. We have been following it quite closely as it has broad general tax significance, has particular relevance to the real estate investment management industry as it relates to property special purpose vehicles (SPVs) and features a number of John’s former colleagues from PwC who were responsible for the original tax planning. 

In December, HMRC were successful in their appeal to the Court of Appeal (“CA”). HMRC had won at the First Tier Tribunal (“FTT”) in 2017 but subsequently lost at the Upper Tribunal (“UT”) in 2019 after the taxpayer appealed.

The case related to a capital loss tax planning scheme from 2004 which involved Development Securities selling properties to Jersey resident subsidiaries that then immediately became UK tax resident. We are not proposing to comment on the broader tax planning scheme, but only on the area on which it failed at the FTT, the tax residence of the Jersey SPVs. A company is regarded as UK tax resident if it is incorporated in the UK or is centrally managed and controlled (CMC test) in the UK. The SPVs in this case were Jersey incorporated, so the relevant test is whether CMC was in Jersey.

As we noted in our commentary on this in 2017, HMRC looked past the monkey and spotted the organ grinder. The FTT agreed with HMRC that the board of the Jersey company was simply following orders from the parent company and therefore CMC was in the UK at the parent. 

The facts in the case were unusual. As the FTT noted:

"From the content of those papers, those directors could not have failed to be aware, on 10 June 2004 or any rate prior to the first board meeting, that they were being asked to set up Jersey companies and to run them from Jersey for a short period only for the purpose of undertaking a specific sole transaction of acquiring assets at an overvalue, which was thereby wholly uncommercial for the companies themselves. We find it difficult to see that in reality, in accepting the appointment in effect to carry out such a limited and specific project, which could only lawfully take place with approval from the parent, the Jersey directors were doing anything other than thereby agreeing to implement the plan for their client, subject only to checking of the legality of it.”

The UT disagreed with the FTT, concluding that the Jersey directors had acted in line with their duties, thus exercising central management and control in Jersey.

As indicated above, the CA has over-ruled this, supporting the FTT position, although there are some interesting points of detail. All three judges disagreed with the UT decision. However, one of the three judges at the CA, Lord Justice Nugee, commented "I have very considerable reservations about the FTT's reasoning and would not want this outcome to be seen as an endorsement by me of the FTT's reasoning.
  He also stated, "Mr Grodzinski" [representing the taxpayer] said that the FTT's decision was the first time in any case where the local board of directors of a company had actually met, had understood what they were being asked to do, had understood why they were being asked to do it, had decided it was lawful, had reviewed for itself the transactional documents, had been found not to have acted mindlessly, but had nevertheless been found not to have exercised CMC. He submitted that that was a significant departure from the previous case law. That seems to me to be right.

Nugee LJ’s comments would seem to us to be key in considering the importance of this case. It is indeed a very significant departure from current case law. It is not yet clear whether this will be appealed further by the taxpayer, and the some of the specific details of the case make it uncertain as to how it will affect HMRC strategy in the approach to CMC going forward.

At a minimum, it would suggest that greater attention should be given to decision making process for boards, particularly in cases such as this where t
here was ‘an absence of corporate benefit’ to the Jersey companies in acquiring the assetsThis would not appear to us to be an unduly onerous burden – this is the general direction of travel for tax, corporate governance and common sense anyway.

As a very minor aside, we spotted a point of detail in the judgement regarding the contentious board meeting. "
The meeting lasted from around 11am to 4pm, but with a break for lunch.” John has partaken in some very convivial lunches in Jersey that would have taken up most of this time, one or more of which may have also involved his former colleagues at PwC. 

We also spotted elsewhere that Nugee LJ has a very fine embroidered covid mask that matches his judicial robes, purchased for him by his daughter. Apparently the hand-made mask features three shades of gold thread stitched on black silk, with two internal layers and a black silk lining. You can find more details
here. This is the sort of vital information that makes this newsletter stand apart from the competition.

Ginkgo Adviser

John’s client Ginkgo Adviser, for which he is the chair of the UK business, has had an article on social impact investment published in IPE Real Assets. You can read it here.

ICAEW webinar

John is speaking on an Institute of Chartered Accountants webinar on 16th February on the future of retail. You can find details here.

If you are not a chartered accountant but would never-the-less like details, please let me know.

Historical trivia - Magna Carta

After Joe Biden in his inauguration speech incorrectly referred to “the” Magna Carta, John promised on Twitter that this historical trivia would be about Magna Carta. Since then, the Daily Telegraph published a bizarre article that suggested that Covid related travel restrictions were rendered invalid by “the” Magna Carta, making our contribution on this important topic even more urgent. 

Magna Carta Libertatum ("Great Charter of Freedoms”) was originally agreed between King John of England and rebellious barons in 1215, although it did not become known as Magna Carta until later. There is some stuff about general freedoms that excites Brexiteer politicians and other assorted nutcases, but the key provision relates to the right to raise taxes, so obviously suitable content for this newsletter. Most of Magna Carta got dropped later, but in this newsletter we analyse things more deeply, so we will go straight to the confirmation of the remaining parts of Magna Carta in English statute law in 1297 in Edward I’s Confirmatio Cartarum (Confirmation of Charters). This covered Magna Carta and the lesser charter, the Forest Charter. This is where the bits of Magna Carta that have not since been repealed remain in force. It is all rather exciting and we feel was sadly neglected in the film “Braveheart”. 

The reason that Edward I had to agree to the Confirmatio Cartarum was due to the loss of the Battle of Stirling Bridge against William Wallace in 1297. Those of you who have seen Braveheart, will remember the English led by John de Warenne, 6th Earl of Surrey and Sir Hugh de Cressingham, sent north like Boris to save the kingdom from rebellion in Scotland. The English force that had crossed Stirling Bridge were routed and Cressingham was killed. Only a small number under the command of the splendidly named Sir Marmaduke Thweng fought their way back across the bridge. Edward I needed money to fund an army to recapture Scotland, for which he needed to raise taxes, always a challenge. After negotiations with the barons bordering on civil war, the Confirmatio Cartarum confirmed the principle that taxation should be by consent. Further detail on practical application was added by Articuli super Cartas in 1300. We lament the omission of the taxation and funding of the English army from Braveheart. Whilst battles and love scenes with Sophie Marceau are all well and good, we feel that a scene of budget setting would have added important context.

The subsequent invasion of Scotland after tax was raised led to the death of John’s ancestor, Sir Alexander Forbes, who led the Scots at the unsuccessful defence of Urquhart Castle in 1303. 

So, to the important question of how to use Magna Carta to procure cheap beer. If you are lucky enough to find a pub that has remained open during lockdown by displaying a sign that says that Article 61 of “the” Magna Carta overrides the lockdown regulations, enter and engage the landlord in conversation. Point to his sign and say, “Ah yes, Article 61 of Magna Carta, of course, Confirmatio Cartarum 1297”. Order your pint and when the landlord passes it to you and suggests a price, respond, “My good man, you appear to have failed to deduct the excise duty and value added tax in calculating the price. If the Queen is in breach of Magna Carta, she has forfeited her right to levy taxes, Confirmatio Cartarum 1297. Please could you recalculate the price.” Although we are confident that this will work, we would like to repeat the disclaimer from our November newsletter:

'In view of people suggesting on social media that if you display a copy of Magna Carta in your business premises, it overrides the Covid lockdown regulations, we would like to draw to your attention that our historical trivia is intended as light-hearted humour and you should not use it as the basis for business decisions without taking legal advice first.'

As usual, feel free to forward this email to others for whom it may be of interest.  If this message was forwarded to you, you can sign up to the mailing list here, and see the previous editions of this mailing here  You can unsubscribe from the list using the links at the bottom of this message.  Our privacy policy can be found here.

Helen Forbes
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