LONDON: Hedge funds in Dublin and Luxembourg are set to be hit by new rules that will force UK investors to pay more tax on the money they hold in offshore funds.
As part of the government’s Autumn Statement on the country’s finances, the Treasury said last week that a loophole that makes offshore funds more tax efficient will be “equalised” from April.
Blackstone, the $361bn investment company, Schroders, the UK’s largest listed fund house and Henderson are among the asset managers that will be affected by the change, which is part of a wider clampdown on tax avoidance that Philip Hammond, the chancellor of the exchequer, hopes will raise £2bn for the public purse by 2022.
“The government will legislate to ensure that performance fees incurred by [offshore reporting] funds … are not deductible against reportable income from April 2017 and instead reduce any tax payable on disposal gains,” the statement said. The Treasury added that the move is intended to “equalise the unfair tax advantage for offshore funds”.
The change means investors in so-called “reporting” funds domiciled offshore will no longer be able to subtract performance fees before calculating how much income tax they owe in the UK. Instead they will have to deduct the performance fee when calculating capital gains tax later.
“Investors will now pay more tax and will pay it earlier,” said Andrew Howard, a tax expert at Ropes & Gray, the law firm. “It depends on the type of fund and whether they have this type of fee but the perception [of investors] will change.”
According to Teresa Owusu-Adjei, a partner at PwC, the consultancy, most offshore funds that target UK investors have reporting status and are much more likely to have performance fees than funds domiciled in the UK. Forty thousand funds are expected to be affected by the move, according to the Treasury. “Anybody that wants to be successful in selling their funds to UK investors would elect for their funds to be reporting funds,” Ms Owusu-Adjei said.
“So the likelihood is that for the UK investor in an offshore fund, it is going to be much less tax efficient for them to be in an offshore fund than a UK fund.”
The move comes just a few months after a public controversy about offshore investment, when it emerged that the father of David Cameron, Britain’s former prime minister, had managed an offshore fund.
In addition to the new rule on performance fees, the government said that it will introduce stricter punishments for people who fail to pay UK tax on offshore interests, and will consider a legal requirement for “intermediaries” that help investors hold money offshore to notify tax authorities in the UK.
A spokesperson for Henderson said the change was “very niche” but added that “to the extent that offshore funds have reduced reportable income in the past, it will mean more income tax payable by UK investors”.
