Wedging open the offshore world

UK investors could soon have access to a wider range of funds following government confirmation in the March Budget that it plans to remove some of the tax anomalies that have historically hindered overseas managers from selling collective investments in Britain.

Changes to the offshore funds regime (OSFR) outlined by the Treasury last month will make it simpler for funds domiciled outside the UK to attain distributor status, allowing them to be sold in Britain without investors suffering punitive tax treatment. Distributor status is important because allows investors’ returns to be treated as chargeable gains rather than taxed as income.

Under the current OSFR, which has been in place since 1984 and is now considered antiquated, funds domiciled offshore cannot attain distributor status if they invest over 5% in other offshore funds that also invest other funds. This sounds complicated, but under European Ucits III rules, which allow a fund to invest up to 10% in other collective investment schemes, multi-tiered funds are a real possibility that do not just affect offshore funds of funds.

By removing some of these restrictions and making it easier for offshore funds to invest in other funds, the government hopes to encourage more foreign groups to distribute funds in the UK and ensure Britain does not lose out to more attractive domiciles like Dublin and Luxembourg. This is good news not just for overseas groups but also for UK investors because it will increase competition

Toby Hogbin, director of product investment solutions and marketing at Credit Suisse Asset Management, says the changes, due to be implemented in this year’s Finance Bill, have lowered the hurdle foreign groups need to jump to justify selling funds into the UK.

“It’s good for the investor because it introduces more efficient competition from asset managers outside the UK,” he added.

Bambos Hambi, manager of Gartmore’s multi manager funds, says the changes will not affect his fund of funds range because they are onshore, but agrees that the move is positive for UK investors. His funds have invested in offshore vehicles run by foreign managers for several years, much to their benefit, he says.

“The better the choice, the better it is for everyone,” he added.

Hogbin says there is also an economic justification for the change. “Fund groups operating on an ex-UK model can achieve additional efficiency serving the UK market using funds domiciled offshore rather than have to run parallel UK vehicles.”

The Investment Management Association (IMA), which is working on specific sectors for offshore funds, has been working closely with government to bring about these and other changes to the OSFR.

In a letter written to Chancellor Gordon Brown in February, it pointed out that certain tax aspects of the current OSFR were counter to European Union (EU) law.

Although the government’s latest move goes some way to creating a free European funds market, the IMA is calling for a full overhaul of the offshore regime ahead of next year’s Budget to ensure Britain does not lose further competitiveness as a funds destination.

Mona Patel, IMA spokesperson, said: “The government''s intention to review the offshore funds regime is a step in the right direction and we hope to see wholesale reform in time for the 2008 Finance Bill.”

1 Apr