In the first of two articles looking at the personal tax treatment of fund managers in the UK and Switzerland ... Marilyn McKeever (pictured) reports on the UK tax climate ...
Fund managers are an increasingly international and mobile community. While many will be exercised at present by matters other than their tax position, others will be considering whether to remain in London following the recent changes to the UK taxation of resident but non-domiciled individuals (non-doms). Other countries, notably Switzerland, are trying to attract non-doms, especially fund managers, to move there.
This first article focusing on the UK, looks on the status of ‘remittance basis users’, that is, UK-resident but non-domiciled individuals who claim the remittance basis and, if they have been in the UK for more than seven years, pay the annual £30,000 remittance basis charge. Even a remittance basis user is taxed on UK arising income and gains, but he/she is taxed on income and gains from outside the UK only if they are remitted to the UK. This includes any form of receipt or enjoyment in the UK.
A manager will receive remuneration derived from management fees and may also have carried interests or other investments in the funds under management. Where the conditions in the British Venture Capitalism Association (BVCA) memorandum are satisfied, disposals of the investments’ underlying carried interests will be taxed as capital gains. Where, as in the case of many hedge funds, the funds are offshore roll-up funds, returns will be taxed as income – at up to 40% rather than capital gains at a flat 18%.
Even after the attack on the treatment of non-doms which culminated in the Finance Act 2008, the UK tax climate remains attractive for remittance basis users.
They will be subject to income tax on UK employment income, but if the employer is located abroad and all the duties of the employment are carried on outside the UK, their salary is taxable on the remittance basis. Scope remains for ‘dual contract’ arrangements where separate UK and non-UK employments can be justified, although HMRC does scrutinise such arrangements closely.
Things look up when we turn to foreign investment income. Non-UK income can be rolled up gross and only comes within the UK tax net if and when it is brought to or used in the UK. If the non-dom leaves the UK again, the income may never be taxed. Similar rules apply to capital gains arising on non-UK situated investments.
Non-doms’ capital gains positions are improved further if their assets, including carried interests, are held in an offshore trust. In this case, there is no immediate tax liability on gains arising, even on UK assets, in contrast to personally held investments. Tax on all gains arising to the trustees may be deferred indefinitely, unless and until a UK resident beneficiary receives a payment or other ‘benefit’ from the trust. The beneficiary may then be taxable on the trustees’ gains. A beneficiary who is a remittance basis user would be taxable only if the payment is remitted to the UK.
If managers become non-UK resident for at least five years, the trustees can distribute the trust assets to them and they will pay no capital gains tax on the proceeds, even if they later return to the UK and remit the funds.
Non-UK assets in a trust established by a non-dom who had been in the UK fewer than 17 years at the time, will be outside the scope of UK inheritance tax for as long as the trust lasts, even if the individual remains in the UK long term and comes within the inheritance tax net.
A benign tax regime is, of course, not the only thing which attracted investment professionals to London. Despite the government’s best efforts to drive non-doms away with its inept introduction of the new tax rules, it remains attractive, and with London’s other plus points, there is no need to abandon ship yet.
• Marilyn McKeever is an associate director at Berwin Leighton Paisner LLP
Next month, Heini Ruedisuehli of Swiss law firm, Lenz & Staehelin, examines the Swiss government’s response to the UK changes.