Capital gains tax regime in UK remains offputting

Capital gains tax cannot be applied at the fund level if UK onshore hedge funds are ever to become a reality, according to Britain's Investment Management Association (IMA).

The IMA is pushing for the Treasury to consider changes to the UK tax regime in its considerations to regulate hedge funds.

UK demand for retail hedge funds needs to be addressed but providers will not seek UK authorisation under the existing tax regime, said Julie Patterson, IMA's director of regulation and tax. Any discussion of the regulation of UK hedge funds will remain academic unless there is reform of the tax regime, as funds will otherwise have no incentive to come onshore, she noted.

The IMA has highlighted a number of problems in addition to the capital gains issue, including stamp duty reserve tax (SDRT). SDRT is applied to onshore collective vehicles and precludes investors from rolling up income tax free until disposal, Patterson said.

'The IMA believes it would be premature to allow a wide range of hedge funds to be authorised now for sale to retail investors, but there is increasing demand from institutional investors and private clients, to which the UK should respond.

'Various aspects of the current regulations need to be amended, according to the IMA, but before funds establish onshore, significant reform of the tax regime will be required.'