UK Treasury Improves Regime For City Investment Funds

by Jason Gorringe, Tax-News.com, London

18 October 2002

Luxembourg and Dublin have established a clear pre-eminence in the European Union as locations in which to base investment funds, and the UK's financial services sector has been pressurising the Treasury for some time to remove some of the regulatory and tax hurdles which have made it difficult for the City to compete.

Now the Treasury has finally given in, and yesterday announced changes which will allow greater freedom for UK institutions to sell unit trusts and shares in OEICs (Open Ended Investment Companies) to non-resident investors.

The most important change is to remove the requirement for investors to declare they are not ordinarily resident in the UK before they can receive interest gross. The Treasury has accepted that most buyers are now corporate nominees, such as banks, making it difficult for the fund manager to identify the underlying investor.

Another key change exempts holdings of overseas investors from inheritance tax. In practice, say tax experts, hardly any overseas investors pay the tax, often because the Inland Revenue can't find them, but the danger of taxation drives away many potential investors.

Announcing the decisions Ruth Kelly, Financial Secretary to the Treasury, said: “Today’s measures will make UK OEICs more attractive to foreign investors. The rules governing overseas investors no longer work well. Removing the need for a NOR declaration and the potential inheritance tax charge will allow UK fund managers to compete on an equal footing with overseas rivals."

Explaining the inheritance tax change, the Treasury said: 'Most developed countries charge non-residents on locally-situated assets. But there are differences in the assets they include. For example, Luxembourg charges non-residents only on Luxembourg real property. Ireland excludes funds based in the “Dublin-docks” financial centre. So funds based in either of these centres are not subject to local death duties in the hands of foreign investors.

'In the UK there is no special inheritance tax treatment of shares in OEICs (or of units in AUTs). They are treated as situated in the UK in the same way as other UK registered shares. That is so even if the “underlying” assets of the collective investment fund are non-UK assets, as they commonly would be in funds calculated to appeal to non-UK-resident investors.'

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