Tax plans will make UK funds more competitive with offshore investments

News - Tax

Written by Ray Clancy

Thursday, 21 January 2010 10:53

The British government has issued draft regulations that will remove tax on non-reporting offshore funds in a move that is expected to make UK funds more competitive.

The proposal to remove 20% tax from investments by UK Authorised Funds in non-reporting offshore funds from March will result in a more level playing field.

At present, when a UK fund disposes of its investments in non-reporting off shore funds (NROFs), the UK fund suffers corporation tax of 20% on the entire gain, which is called an Offshore Income Gain.

Also 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 favourable position.

In particular, exempt investors, such as pension funds, charities, and CTF, ISA and 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.

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.

The Investment Management Association, the trade body for the UK’s £3 trillion asset management industry, said the move will be widely welcomed. ‘These proposals are another step forward in helping the UK funds industry to compete on level terms with the offshore industry,’ explained Julie Patterson, Director of Tax and Authorised Funds at the IMA.

‘At present, many types of UK investors are disadvantaged if they invest in UK funds that invest in non-reporting offshore funds, compared with investing in such non-reporting offshore funds 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 authorised funds,’ she added.
The IMA said it also welcomed the Government’s statement that it will continue to work with industry and will consider further development of the regulations following their initial introduction.