managers set to move funds to countries with lower cost bases
The UK fund industry is in danger of losing substantial assets to its offshore competition following the announcement of plans to tax large investors in UK-based funds.
The warning came after the pre-budget statement by the British Chancellor of the Exchequer Gordon Brown, in which he proposed that a capital gains tax should be imposed on UK funds if a single investor holds 10% or more of the assets. The obvious way to avoid this tax would be to move the money offshore, according to law firm Eversheds.
"If the proposals go ahead it is likely managers would restructure and merge with their offshore funds and turn to centres such as Dublin or Luxembourg," said Camilla Spielman, senior associate at Eversheds. "There would be a huge movement of funds from the UK."
Brown's intention is that a UK-domiciled fund should lose its Authorised Investment Funds (AIFs) taxation arrangements if a single investor holds 10% or more of the portfolio. This means if a single investor in the fund holds more than 10%, a capital gains tax charge would be triggered for all investors in the portfolio regardless of holdings.
This would result in weaker performance by UK-domiciled funds and would probably see managers moving to structure funds in countries that, in any case, have lower cost bases.
Spielman said: "If this ruling was introduced, the capital gains tax exemption would disappear which would mean lower returns for the investor. Any gains are normally re-invested in the fund. This proposal would mean there is less to be re-invested."
Capital gains tax on funds can be steep. It varies from 100% if the investor has only held the fund for a short period to 60% if it has been 10 years or more. Only, the first £8,200 is exempt from being taxed.
It is possible around a third of all AIFs would have a single investor holding of 10% or more as a third of insurance companies have holdings in some kind of AIFs. Most insurance companies invest in AIFs through a single nominee name. Funds of funds and multi-manager providers also invest in AIFs through a single nominee name. This means around a third of AIFs would trigger a capital exemption charge for all investors in the fund regardless of what their holdings were.
The Investment Management Association is presently in discussion with the Inland Revenue to work on a solution to what to do with other AIFs such as unit trusts and Oeics. There has been a suggestion that the investor should get directly taxed, not the fund.
Spielman warns: "While this sounds good in practice as fund holdings change on a daily basis, a holder could be unlikely to know if they had crossed the 10% limit."
One source told International Investment that the Inland Revenue has decided AIF structures such as Qualified Investment Schemes will now not be included and will not incur a capital gains tax charge.
However, another source suggested the proposals have made Qualified Investment Scheme managers so concerned they have become skeptical about setting up future structures in the UK. Even though Inland Revenue has suggested Qualified Investment Schemes will not be touched, they fear further proposals might be introduced at a later stage that could be detrimental.
The Inland Revenue had no comment.
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