It’s About T-IME: Reviewing the Proposed Reforms of the UK Investment Manager Exemption

On April 28, 2025, the UK government published proposed reforms to the Investment Manager Exemption (“IME”) in the form of draft legislation and a revised HMRC Statement of Practice (non-statutory guidance). The amendments are proposed in connection with a mooted expansion of the UK’s domestic law definition of permanent establishment (“PE”), which could bring more non-UK fund entities into the scope of UK tax (the PE changes are not discussed further in this note).

Partly to counter any unintended consequences of the PE changes, but also as a long overdue refresh of certain aspects, the proposed simplifications to the IME: (i) broaden the definition of “investment transactions”; (ii) remove the 20% condition; (iii) clarify that the IME is separate to (and therefore a failure to meet it does not exclude the potential application of) the domestic and treaty definition of an ”agent of independent status”; and (iv) change the independent capacity condition. While not exclusively positive, the proposed changes should generally be beneficial for UK investment managers and non-UK funds seeking to rely on the IME or another exemption from UK tax.

Background

The IME is of critical importance to the UK alternative fund industry. In short, provided the conditions of the exemption are satisfied, it gives non-UK funds and their investors comfort that they will not be subject to UK tax by reason of the fund trading in the UK through a UK investment manager. The conditions that must currently be met are that:

1. transactions being carried out are “investment transactions”;
2. the investment manager carries on a business of providing investment management services, and the transactions are carried on in the ordinary course of that business;
3. transactions are carried out by the investment manager in an independent capacity;
4. the requirements of the 20% rule are met; and
5. the remuneration of the investment manager is not less than customary for the relevant class of business.

The definition of “investment transactions”

The scope of the IME is restricted to income arising in connection with specified “investment transactions” carried out by the UK investment manager on behalf of a fund. Current legislation includes specific types of transactions that are included in this definition. While the list covers most common types of investment, the current approach is not dynamic or responsive to new developments in asset classes. For example, crypto assets were added to the list in 2023, lagging behind investment in that asset class.

The proposal is to adopt a permissive approach by listing exclusions instead of permitted transactions and by shifting the focus to the status of the investment fund itself. In short, all investments made by a genuine investment fund (defined as an alternative investment fund (AIF) or collective investment scheme (CIS)) should qualify unless they involve an excluded subject matter such as UK land or trading physical commodities. Such investments remain outside the scope of “investment transactions” (although there are certain exceptions for derivative contracts without physical delivery and those referencing a qualifying index).

As a technical matter, requiring investment funds to be classed as an AIF or CIS may exclude investments made through underlying asset holding companies. We understand that this is not intended, and it is hoped that the point can be clarified.

Removing the 20% test

One of the current requirements for the IME is that investment managers must not hold more than 20% of the “beneficial entitlement” to the fund’s taxable trading income profits (after deducting certain fees) earned in any period not exceeding 5 years. This can present issues in a fund’s early years where individual managers have seeded the fund to a significant extent, or in the case of significant third-party redemptions.

The proposed reforms remove this condition entirely. As the government notes, it has caused practical difficulties and was not a clear indication of independence.

Adjustments to satisfy independent capacity

HMRC has proposed revisions to its Statement of Practice guidance on the satisfaction of the independent capacity condition. First, being a “qualifying fund” has been added as an additional route to being considered independent. This uses the same test as the Qualifying Asset Holding Company regime (i.e., the satisfaction of a diversity of ownership condition).

However, if the fund cannot meet the diversity of ownership condition, certain of the proposed changes to HMRC’s interpretation of the independent capacity test may be unhelpful. For example, the changes would reduce the safe harbour threshold for the provision of services to the non-resident fund as a percentage of the investment manager’s total business which should not be exceeded for the relationship to be regarded as independent from 70% to 50%. Accordingly, this which may be unhelpful in the case of a single fund or where an investment manager manages one dominant fund and therefore would need to rely on a more nebulous overall facts and circumstances type view of independence.

In addition, the independent capacity test is currently satisfied even if the fund is not widely held but the fund is being “actively marketed” with the intention of becoming widely held. While this has been retained, the changes would clarify that operating on a business-as-usual basis with an expectation that the position will rectify itself is not sufficient for these purposes. This may create uncertainty for funds which are actively marketed on an ongoing basis, suggesting that their approach to marketing may need to change if the fund has not become widely held over a reasonable period, or in the event of significant investor outgoings which cause the fund to cease being widely held.

Agent of independent status

The updated draft legislation and Statement of Practice clarifies that the domestic PE exemption for an agent of independent status is not reliant solely on satisfying the IME conditions. This means that non-resident companies that fail to satisfy the IME (for example because they have investment transactions not covered by the IME) may still qualify for the independent agent exemption, as amended (although HMRC has stated in the revised guidance that HMRC considers it likely that a genuinely independent investment manager should meet the conditions of the IME). However, this must be considered in the context of other proposed amendments to the PE regime and the independent agent exemption.

Conclusion

The proposed changes to the IME aim to modernise and simplify the conditions to qualify for the IME in the light of potential changes to the PE definition. While the proposed reforms remove the 20% test, which is a clear and universally positive change, other changes act to both broaden and narrow the requirements to satisfy other conditions for the IME and must be scrutinised on a case-by-case basis. These proposals are in the consultation stage until July, 7 2025 and the earliest date legislation could be implemented is  January, 1 2026.