Following Royal Assent of the Finance Act (No 2) 2023, new guidance on the application of the Genuine Diversity of Ownership (“GDO”) condition was published by HMRC on 12 July. The GDO condition is relevant for a number of fund tax regimes including those for Property AIFs (“PAIFs”), Tax Elected Funds, Qualified Investor Schemes (“QIS”), Long Term Asset Funds (“LTAFs”), Qualifying Asset Holding Companies (“QAHCs”), Real Estate Investment Trusts (“REITs”), Co-ownership Authorised Contractual Schemes (“CoACS”) seeding relief, and the Non-Resident Capital Gains (“NRCG”) rules. It is likely also to apply in the context of the Reserved Investor Fund (“RIF”) rules, assuming the proposal is taken forward.
The purpose of the GDO requirements is to identify arrangements which are marketed, and made available, to a wide range of prospective investors who are unconnected with one another, as distinct from private arrangements made available only to a specific set of investors. There are differences in the detail of the GDO condition as it applies in each regime, however the guidance seeks to provide a common framework for applying the GDO requirements.
The new guidance recognises, particularly in the context of the QAHC, NRCG and REIT rules, that funds may involve complex structures involving a series of entities which, in substance, form part of a single overall arrangement. These may include parallel funds, feeder funds, aggregator funds, and alternative investment vehicles. In such cases, while the individual entities may not meet the GDO requirement, if an investor in an entity would (analysed objectively) reasonably regard their investment to be in the arrangements as a whole (i.e. the investment exposure of the entity is linked to the performance of the fund as a whole), then the guidance clarifies that the GDO condition will be assessed based on the whole multi-vehicle arrangement rather than the individual entity. However, where the arrangements include a co-investment vehicle designed to allow investors to gain additional economic exposure to a particular investment, this would not be considered part of the multi-vehicle arrangement, and the GDO condition would be assessed at the level of the co-investment vehicle alone.
The guidance also clarifies that closed-ended funds (including successor funds) are not prevented from being considered as meeting the GDO requirement merely because the fund size is capped, or because marketing of the fund ceases after its fundraising period ends.
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