UK: Tax Changes For Investment Managers And Offshore Funds

Last Updated: 29 February 2008
Article by Mark Stapleton

Pre-Budget Report

The United Kingdom Treasury released to Parliament on 9 October its 2007 Pre-Budget Report and Comprehensive Spending Review ("Pre-Budget Report"). We have set out below some important tax issues arising from the Pre-Budget Report that are of particular significance to offshore funds and investment managers.

Offshore Funds

The Government has issued a discussion paper that proposes to change existing tax rules applicable to offshore funds and their investors.

Current rules seek to tax certain gains of investors in offshore funds as income. However, provided the offshore fund qualifies as a distributing fund such gains remain subject to tax as capital gains. The proposed new rules will broadly retain this approach for investors but will change the rules that determine the type of fund that can confer capital gains treatment on its investors. Given that from 6 April 2008 capital gains tax will be imposed at a flat rate of 18% for individuals (see below), this issue will assume greater importance for investors.

The discussion document envisages a new taxation regime being introduced for offshore funds when the Finance Bill 2008 receives Royal Assent (Summer 2008). Some of the
key proposals are as follows:

  • A new definition of "offshore fund" is proposed for tax purposes. The new definition would be based on certain key characteristics rather than the current definitions, which are based on definitions in the Financial Services and Markets Act 2000. In summary, it is proposed that an offshore fund for the purposes of the new legislation will be any non-UK vehicle where investors pool their money to invest collectively in various assets where those assets are not managed by the investors themselves. However, the new definition would only apply to offshore funds that provide investors with a return substantially equivalent to the net asset value of its share in the fund. Further, it would exclude funds that are tax transparent for income purposes, such as most offshore property unit trusts. This would also exclude many funds established as partnerships that would be of relevance to many hedge funds.
  • Distributing fund status would be replaced by reporting fund status. This would differ from distributing fund status in the following ways:
  • The requirement to distribute 85% of income would be replaced with a need to report 100% of the fund's income. This means that there would no longer be a need to physically distribute income but rather there may be deemed distributions or a combination of physical and deemed distributions. Deemed distributions should assist those funds which seek to accumulate income. A UK investor in a reporting fund will be taxable on its share of income in the reporting fund whether or not it is actually distributed.
  • The rule that a distributing fund may not invest more than 5% of its assets in other offshore funds would be abolished. Instead, funds investing in other offshore funds would need to take into account reported income of those funds for the purposes of its own reporting requirements. If the fund is a non-reporting fund, the income would be based on the increase in the fair value of the fund over the period. This would be a useful simplification measure but may lead to unpredictable amounts of reportable income flowing up into reporting funds from investments in non-reporting funds (which may include many hedge funds).
  • It is suggested that a new calculation of reportable income based on IAS/GAAP serve as an alternative to the current UK equivalent profits (UKEP) calculation. The intention of this proposal is to reduce the administrative burden of calculating UKEP. However, it might also provide an opportunity for more hedge funds to become reporting funds as compared to those previously able to obtain distributing status, thereby enabling their investors to obtain the benefit of capital gains treatment. This would be on the basis that an appropriate accounting-based test of income could remove the concern about trading activity profits constituting income. However, it is not yet clear whether an accounting-based test will provide a workable solution.
  • An advance clearance procedure would be established so that a reporting fund would not need to seek certification in respect of past accounting periods, as is currently the case. This would produce greater certainty for investors on fund launches.

The Investment Management Exemption

Offshore funds and UK-based investment managers can become subject to UK taxation on profits generated by the fund if the conditions associated with the "Investment Management Exemption" (IME) cannot be met. This is particularly so with hedge funds as they are more likely to be carrying on a trading activity rather than an investment activity, for UK tax purposes. One of the conditions of the IME is that it only applies to "investment transactions" and although the scope of such transactions has been extended recently, HM Revenue & Customs (HMRC) will align the definition more closely with the definition used for regulatory purposes. This will include a wider range of transactions within the definition, such as transactions in renewable energy related products and other new structured products.

In addition, HMRC previously took the view that if an offshore fund carried on a single transaction through its UK investment manager that was not an investment transaction then that could give rise to UK taxation in respect of all transactions carried on by the investment manager in the UK on behalf of the fund. HMRC now proposes to introduce a more proportionate tax consequence should such an eventuality arise. This is a sensible and welcome change that the industry has been pushing forsome time.

Capital Gains Tax

From 8 April 2008, there will be a single tax rate of 18% applicable to capital gains of individuals and trusts. This will almost double the rate of tax for a hedge fund manager on the sale of his business and therefore consideration should be given to advancing sales prior to 6 April 2008 where possible. Conversely, this will reduce the tax rate relevant to sales of interests in distributing funds, making this a more significant issue for investment managers and investors (see above).

Non-Domiciled Individuals And Residence

With effect from 6 April 2008 new legislation will introduce an additional tax charge for non-domiciled individuals using the remittance basis of taxation (so that after being resident in the UK for 7 years, a non-domiciled individual may only use the remittance basis of taxation if they pay an additional of £30,000 per year). All previous years of UK residence will count from that day. In addition, UK resident but non-domiciled individuals using the remittance basis of taxation will cease to be automatically entitled to personal tax allowances. However, the restriction of the remittance basis with respect to investment income arising in the Republic of Ireland will be removed, which may benefit UK investors in certain Irish funds. There has also been an important change to the residence rules so that days spent travelling to and from the UK will count as days spent in the UK. This is contrary to past practice, which did not count such days and will accordingly increase the likelihood of individuals being treated as UK resident.

Financial Derivatives

HMRC has confirmed that the use of financial derivatives is not of itself indicative of trading. Taking short positions is no more or less likely to constitute trading than taking long positions. Although this clarification is helpful, it does not, of itself, clarify whether a hedge funds activity is or is not a trading activity for UK tax purposes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions