UK May Put Annual Tax On Offshore Funds

by Jason Gorringe, Tax-News.com, London

23 April 2002

In a post-Budget measure, the UK's Inland Revenue yesterday issued a consultation paper on its proposed changes to the taxation of offshore funds, including a suggestion that investors in many types of offshore fund would have to pay income tax on a yearly basis whether gains are distributed or not.

Currently, offshore funds are taxed on the same basis as UK funds, provided that investments conform to UK regulatory guidelines. Fund managers who gain 'distributor' status can then market their funds in the UK. But there is a considerable administrative burden involved every year, and the consultation document puts forward various options for reducing it, of which the annual taxation proposal is one.

The current regime has been in place since 1984 and was designed partly to clamp down on the use of offshore "roll-up" investment funds to convert income into capital. The Revenue says that changes in the market have prompted its review, but it has also been influenced by complaints from other EU fund managers and the European Commission that the current regime discriminates against providers from other EU countries.

If adopted, the Revenue's proposals could remove the attractions of offshore hedge funds for many high-net worth individuals. Hedge fund operators say it would mean investors paying tax on notional gains that may disappear by the time they cash in their holdings.

"Overall this is very negative and seems difficult to defend - there is no guarantee you will actually make that money," said Simon Colson, chief investment officer at Trafalgar Capital Management, which has two Cayman Islands-based hedge funds.

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