Asset managers showing appetite for ACS fund structure

There has been a growing interest in Authorised Contractual Schemes (ACSs), or UK Tax Transparent Funds (TTFs) over the last 12 months, according to HSBC Securities Services.

First unveiled by the UK government in 2013, it was hoped the ACS structure would strengthen the UK’s position as a major fund domicile. One of the key advantages of the ACS is that it facilitates a master-feeder structure in a tax efficient manner, ultimately benefiting the end investors.

“Interest among asset managers in setting up ACS structures has increased markedly, and this has been driven by investors who recognise the tax benefits such schemes can have. A number of tax authorities will apply look-thru arrangements on tax transparent vehicles whereby they impose withholding taxes on investors which are equivalent to what the investor would have received on income directly. As such, investing into an ACS means certain investors will suffer less withholding tax than investing via traditional corporate or trust type fund vehicles,” said Edward Turner, head of tax products at HSBC Securities Services in London.

Interest in the ACS is notable among pension fund investors, for example. An HSBC paper highlighted that UK pension funds would typically be subject to a 15% or even 30% withholding tax on US dividend income if they invested in a co-mingled fund without tax transparency. This tax can have a major impact on returns, particularly as these pension funds look to improve investment efficiency and tackle rising pension liabilities. However, investment via an ACS ensures these pension fund investors access the reduced withholding tax rates they are entitled to, which would include a 0% rate on US dividends.

“This is very attractive for end investors and it is a major driver for the growing interest in these fund vehicles,” explained Turner. He added a number of investment consultants and institutional investors were recognizing the tax efficiencies associated with ACS structures and encouraging clients to embrace them.

Previously asset managers had sought to address this by establishing Life Company structures as part of their product suite offered to UK Pension Funds. Such structures are also able to access pension fund withholding tax rates provided certain criteria are met. However, the rising cost of capital associated with Life Companies under Solvency II means such structures are increasingly expensive and burdensome for asset managers to operate. The ACS gives managers the opportunity to offer the same tax efficiencies to a wider range of investors without introducing such inefficiencies.

These entities also enable asset managers to achieve economies of scale as it allows them to consolidate multiple funds into a handful of tax transparent, pooled vehicles. This can cut costs as well as administrative fees. “The ACS also allows start-up fund managers to grow their businesses and create scale without replicating strategies across multiple fund structures for different investors,” said Turner.

Furthermore, the product can also be marketed to non-UK investors in what could lead to some interesting competition emerging between the UK and more traditional European fund domiciles such as Ireland and Luxembourg. “Those managing ACS structures are certainly looking towards non-UK investors and we are noticing particular interest from Asia, for example,” said Turner.