UK Treasury To Examine Tax Treatment Of Overseas Invested Funds Of Funds

by Jason Gorringe, Tax-News.com, London

18 October 2006

UK Treasury Minister, Ed Balls on Tuesday launched a consultation on the way in which overseas funds of funds are taxed.

The government, recently beset with bad publicity regarding the UK's attractiveness as a domicile for financial services business, is seeking to equalise the tax treatment of such multi-tiered funds, regardless of where their constituent investments are based.

The current regime was put in place 22 years ago, and does not, the Treasury believes, accurately reflect the current investment climate.

The new legislation, when decided upon, is likely to be included in the 2007 Finance Bill.

A report compiled for the Investment Management Association (IMA) by KPMG earlier this month concluded that the 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 has failed 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.

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.”

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