Tax insurance and the winding-up of investment funds

27 February 2019

The life span of a private equity or real estate fund vehicle (“fund”) is often intentionally limited. Once the specific purpose of a fund has been fulfilled (i.e. holding investment assets for a period of time) the intention would be to dispose of the assets, distribute the proceeds to investors, and wind up the fund. However, tax issues may often prevent this from happening. It is the purpose of this bulletin to explain how tax insurance may solve tax related challenges and facilitate the winding up of funds.

On disposal of its investment and subsequent winding up, a fund may be confronted with the following tax challenges:

1. The Buyer may insist on indemnities to be provided by the fund for any identified tax risks relating to the legal entities being disposed of by the fund. Such indemnities may be required for a period of up to 7 years or longer.

2. On a voluntary liquidation of the fund, a liquidator may be concerned that the tax authorities will pursue the fund itself for certain tax liabilities e.g. capital gains tax relating to a disposal by the fund, which may prevent the liquidator to distribute all proceeds to investors immediately.

Tax indemnity provided by the fund

The fund may be required to holds funds in escrow for 7 years or longer (depending on the jurisdiction) to cover any potential tax liabilities relating to the indemnity. Clearly this is not in the interest of the fund or the investors, who may wish to immediately realise their investments.

In many cases it may be possible to obtain insurance cover for identified tax risks, which would normally be covered by tax indemnities. Where such cover is obtained, it should negate the need for the fund to provide an indemnity and keep funds in escrow.

Voluntary liquidation

Liquidators have a duty to act with reasonable skill and care in carrying out their statutory duties as office-holder. Included in this is the obligation to ensure that all expenses are paid before funds are distributed to investors/shareholders, including tax liabilities. On a disposal of fund investments, tax consequences may be triggered for the und under certain circumstances.

Even though tax advice obtained may indicate that such taxes should not apply, a liquidator may still not feel comfortable enough to distribute all funds to investors, whilst a latent tax liability may still materialise for the fund. Depending on the size of the liability, there may be a significant opportunity cost for investors if these funds are withheld for a period of up to 7 years or longer.

Obtaining tax insurance for the potential tax risk may provide enough comfort to a liquidator to distribute all funds to investors.


Tax insurance is increasingly viewed as a viable solution to tax challenges, which may delay or prevent the making of full distributions to investors or the winding up of investment funds. In order for tax insurance to be effective as a solution in these circumstances, the buyer (seeking an indemnity from the fund) or liquidator of the fund should ideally be involved in the insurance process to ensure that the particular tax insurance policy provides them with the necessary comfort they require.

For further information contact Leon Steenkamp, Head of Tax Insurance, on +44 (0)20 7558 3994