UK Fund Managers Welcome Tax Proposals

by Robert Lee, Tax-News.com, London

25 January 2010

The UK Treasury has issued draft regulations that will change the tax treatment of investments by UK Authorized Funds in non-reporting offshore funds (NROFs) with effect from March 2010.

NROFs are funds that do not distribute or report their income to investors. The new rules will effectively remove the 20% tax that at present "sticks" in the UK fund and will result in different types of investors having a tax outcome that is much closer to the position if they invest directly in NROFs or via another offshore fund.

Responding to the proposals, Julie Patterson, Director of Tax and Authorized Funds at the UK Investment Management Association, said: "These proposals are another step forward in helping the UK funds industry to compete on level terms with the offshore industry."

"At present, many types of UK investors are disadvantaged if they invest in UK funds that invest in [NROFs], compared with investing in such [NROFs] direct or via an offshore fund of funds. We therefore welcome these proposals, which have been drawn up in the context of the FSA's consideration of ‘Funds of Alternative Investment Funds', but which will apply to all authorized funds."

"We also welcome the government's statement that it will continue to work with industry and will consider further development of the regulations following their initial introduction."

At present, when a UK fund disposes of its investments in NROFs, the UK fund suffers corporation tax of 20% on the entire gain, which is called an "Offshore Income Gain." Furthermore, when individual investors dispose of their shares/units of that UK fund, the investors may have to pay a further 18% in capital gains tax.

Overall, this leaves some investors in a worse position than if they had invested directly in NROFs, and others in a more favorable position. In particular, exempt investors (such as pension funds, charities, and child trust fund (CTF), individual savings account (ISA) and self-invested personal pension (SIPP) investors) cannot reclaim the 20% tax suffered by the fund itself.

Consequently, there is currently very little investment by UK funds in NROFs, and any fund wishing to invest in such vehicles would need to be set up offshore.

Recommended