IMA WELCOMES DRAFT REGULATIONS TO REMOVE TAX ON INVESTMENTS BY UK FUNDS IN CERTAIN OFFSHORE FUNDS

• 20% tax to be removed from investments by UK Authorised Funds in non-reporting offshore funds - levelling UK fund treatment with offshore funds.

The Treasury has issued draft regulations that will change the tax treatment of investments by UK Authorised Funds in non-reporting offshore funds ("NROFs") with effect from March 2010.  NROFs are funds that do not distribute or report their income to investors. 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.

Responding to the proposals, Julie Patterson, Director of Tax and Authorised Funds said:

"These proposals are another step forward in helping the UK funds industry to compete on level terms with the offshore industry.

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.

We also welcome the Government's statement that it will continue to work with industry and will consider further development of the regulations following their initial introduction."

At present, when a UK fund disposes of its investments in NROFs, the UK fund suffers corporation tax of 20% on the entire gain, which is called an "Offshore Income Gain".  Furthermore, 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 draft rules can be viewed here: http://www.hm-treasury.gov.uk/finrofs_draftregulations.htm

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About the Investment Management Association
The IMA is the trade body for the UK's £3 trillion asset management industry.  The money its members manage is in a wide variety of investment vehicles including authorised investment funds, pension funds and stocks and shares ISAs.  Its role is to represent the industry and promote high standards. www.investmentuk.org 

For further information, please contact:
Noreen Shah, Press Officer, IMA, 020 7831 0898
Ginny Broad, Head of Communications, IMA, 020 7831 0898 or 07834 089332

Email: press@investmentuk.org