UK government proposes to include crypto-assets in investment manager exemption

HMRC is consulting on the scope of a proposal to extend the existing investment manager exemption (IME) to include crypto-assets.

The IME exemption specifies the types of investment transactions that UK-based managers of collective investment arrangements can conduct on behalf of non-UK resident investors without bringing them into the scope of UK taxation. It includes a list of asset types that qualify for exemption.

Most of the world’s funds are located outside the UK and the funds and their investors are subject to the tax rules of their countries of residence, says HM Treasury. A non-resident fund that is managed by an independent UK-based investment manager would not usually be expected to have a taxable presence in the UK, but there can be uncertainty on this point, which acts as a disincentive to UK fund managers including crypto-assets in their portfolios.

The IME provides an assurance to investment managers and investors that, where qualifying tests are met, there will be no charge to corporation tax for overseas corporate investors, or to income tax for individuals. This provides non-resident funds with the ability to appoint UK-based investment managers without creating a risk of UK taxation for the foreign domiciled fund.

The consultation will consider how to define ‘crypto-assets’ and which categories of crypto-assets should be included within the exemption. Currently, HMRC is considering the adoption of a crypto-asset definition similar to that proposed in the OECD’s Crypto-Asset Reporting Framework published in March 2022. That definition, currently subject to consultation, refers to ‘a digital representation of value that relies on a cryptographically secured distributed ledger or a similar technology to validate and secure transactions’. However, HMRC wants to refine this definition to exclude transactions in land and crypto-assets that provide for the transfer of tangible assets or intangible assets not already included in the exempt list.

The consultation will also seek views on whether the expanded list should apply to other fund tax regimes that also use the exemption, such as diversely owned authorised investment funds, exempt unauthorised unit trusts, diversely owned reporting offshore funds and approved investment trusts.

The government says its intention is to provide tax certainty to investment managers seeking to include types of crypto-assets in portfolios and encourage new crypto-asset investment management businesses to base themselves inФ the UK.

The deadline for consultation responses is 18 July 2022.