Investment companies fail to take up benefits of TEFs

Investors are being hit by extra tax as investment companies fail to take up the benefits of tax elected funds (TEFs).

"Investors are getting unnecessarily taxed as they are waiting for funds to convert to TEFs," Julie Patterson, the Investment Management Association (IMA's) director of taxation and authorised funds, said.

Income distributed through TEFs is not taxed within the fund, so investors with tax-efficient wrappers such as ISAs stand to save money. This is the case even if the fund invests in equities, where ISA investors would usually be hit by tax.

Querns Asset Managers launched the Querns Income First Fund, a TEF, earlier this month.

"It's amazing that so few people have taken up TEFs," Phil Roantree, one of the partners at the new Querns fund, said.

"When we first started talking about launching an investment firm last summer, the TEF was one of the big developments we wanted to take up," he said.

Roantree works alongside Stephen Whittaker, ex-New Star chief investment officer (CIO), Peter Gardner, a former technical director at Perpetual and compliance and risk director at Invesco, and John Tierney, ex-sales director at Perpetual.

Roantree says until the TEF regime was introduced, it was only possible to receive gross interest from UK funds that paid interest distributions, and such funds were required to have a minimum of 60 per cent invested in fixed interest investments. The Querns Income First Fund does not have that restriction.

One international investment house says it has been discouraged from converting its funds to TEF status, as the regime does not support platforms at the moment, which is where most of its business is.
The IMA says cost and administration may be preventing funds from converting to TEF status.

"There will be costs associated with joining the TEF regime. The most significant will be one-off upfront costs such as changing IT systems to comply with the regime, increased administration to ensure that income remains identifiable as it passes through the fund to its investors, and giving notice to investors that the fund is joining the regime. We understand that some funds which would like to elect to become TEFs are experiencing issues with converting their IT systems in order to track the income streams," the body said.