UK Investment Managers Welcome Budget
Friday, June 25, 2010

While many investors in the UK have been stung by the 10% increase in capital gains tax from midnight on June 23, investment managers say that the move will have a little impact on authorized funds. The announcement in the budget report of further discussions concerning the competitiveness of UK funds has also been welcomed.

The emergency budget, announced by Chancellor George Osborne on June 23, increased the rate of capital gains tax from 18% to 28% for higher rate taxpayers, that is, those who earn more than GBP37,400 per year and who pay 40% income tax on earnings above this threshold. Basic rate taxpayers will continue to pay CGT at 18%, as the government attempts to shut off a route for tax avoidance by better aligning GCT rates with income tax rates.

While tax experts have suggested that the CGT hike for higher rate taxpayers could affect most of the 1 million buy-to-let investors in the UK, as well as the 250,000 second home owners, the Investment Fund Managers Association anticipates that the change will have little or no impact on authorized funds, "so the majority of investors in funds will remain unaffected."

"Authorized funds will remain exempt from capital gains tax on any gains made in the fund," the IMA says.

Osborne's decision to leave the GBP10,100 CGT threshold on hold was also welcomed by the IMA. "This provides an important buffer for those on modest to middle incomes against capital gains arising simply from inflation," Julie Patterson, Director of Authorized Funds & Tax at the IMA. "It keeps thousands of basic rate tax payers out of complex annual tax calculations as they draw down their savings during retirement. Preserving the threshold sends an important message that people should continue to be encouraged to save for the long-term."

The IMA says that the majority of investors can manage their annual exemption to ensure that they do not pay CGT when they dispose of their investments. Pension funds, charities and individual investors holding their fund investments in ISAs, personal pension arrangements or offshore funds continue to be exempt from CGT on any gains made on investments.

Patterson also praised the government's commitment in the budget report to consult with the industry on further improvements to the UK's fund tax regime.

"Over recent years positive steps have been taken to modernize the UK's fund taxation regime," she commented. "However in the light of European regulatory developments, more needs to be done. We look forward to working with officials further to enhance the competitiveness of the UK funds industry."

"In order to compete more strongly for fund domicile business, the UK needs to offer tax-transparent contractual vehicles and to abolish the fund-specific and very low tax-generating Stamp Duty Reserve Tax regime," Patterson said. "The UK could then capitalize on the growth opportunities being created by the UCITS Directive, which enables master-feeder funds to be marketed across Europe, and the Alternative Investment Fund Managers Directive, which is leading non-EU funds to consider relocating to Europe."