UK Passed Over As Fund Domicile, Research Reveals

by Philip Morton, Investors Offshore.com

12 October 2006

A report compiled for the Investment Management Association (IMA) by KPMG has concluded that the UK tax regime for funds has caused the UK to lose out as a fund domicile.

According to the KPMG research, despite its position as a "vibrant and leading" centre for investment management, the UK is failing to attract new investment funds, which are instead being set up in Luxembourg, Ireland and elsewhere. Many investment managers believe this is down to the UK's unfavourable tax regime.

In the last two years, net sales of non-UK funds have grown from 1% to 20% of the UK market, while sales of UK funds abroad remain very low. This trend is set to continue, particularly as funds evolve and become more complex, according to KPMG.

Jane McCormick, Head of Tax and Financial Services at KPMG commented:

“The growth in fund assets domiciled here has been well behind the competition. Between 1995 and 2005, growth in fund assets domiciled in Luxembourg and Ireland has been respectively ten times and twice that of the UK. The view of the vast majority of UK investment managers we interviewed is that the UK’s complex tax system for funds is largely to blame."

"However, the survey also highlights that there is not yet a clear EU domicile of choice for alternative investments. Given the strength of the UK’s financial services sector, there is a real opportunity for the UK to fill that gap. Changes to the tax system are required before the opportunity is lost.”

Julie Patterson, Director of Regulation, Operations and Taxation, of IMA observed that:

"The UK is losing out because of the unnecessarily complex and burdensome tax regime. Funds are being established overseas and many jobs go with them, leading to a loss of revenue for the UK. The fear is that the UK investment management industry is approaching a tipping point with more and more of the value chain being domiciled overseas."

She concluded:

"But it is not too late to do something about it. The industry is not calling for tax breaks but for a simpler tax regime which will be beneficial to investors, the government and industry alike.”

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