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Important Changes in UK Tax Law for U.S. Fund Managers
Monday, August 31, 2015

The Chancellor of the Exchequer's budget of July 2015 contained two changes to UK tax law of specific interest to U.S. Fund Managers with operations in the UK and their U.S. executives based in the UK.

Carried Interest

Partners in UK-based private equity funds will be faced with higher tax bills after the Chancellor announced that the full rate of capital gains tax would apply to deal profits. This marks a dramatic change for fund managers who receive carried interest—the share of an investment or investment fund's net profits allocated to the fund manager.

Effective July 8, 2015, recipients of carried interest will be subject to capital gains tax (28%) on the full amount of that carried interest with no base cost. Until now, investment fund managers' carried interest was taxed at effective rates of capital gains tax below the normal rates by virtue of a regime known as "base cost shift." This regime has been withdrawn.

The Chancellor also announced a consultation on carried interest in certain types of funds (e.g., hedge funds) being subject to income tax.

Non-Doms

Non-doms are individuals who reside in the UK but were born abroad, have another nationality and consider their country of origin as their homeland. For many years non-doms have enjoyed a privileged status under UK tax law. As a result, they pay a fixed fee to benefit from the status and then pay UK tax only on capital or income actually remitted into the UK.

Many U.S. fund management executives living in the UK currently enjoy non-dom status.

The taxation treatment of non-doms will change effective April 6, 2017 to prevent permanent non-dom status. Any individual who is tax-resident in the UK for 15 out of the previous 20 years will automatically be treated as UK-domiciled. However, if the individual leaves the UK for at least five years, the clock will re-start.

Individuals with a UK domicile of origin (i.e., born in the UK to UK-domiciled parents) will be deemed to be UK-domiciled whenever they reside in the UK, so from April 6, 2017 it will no longer be possible for them to claim non-dom status by leaving the UK temporarily and then returning.

UK residential property owned indirectly by a non-dom through a non-UK company will also be subject to inheritance tax. This will likely lead to significant reassessment of corporate envelope structures for UK residential property.

Conclusion

These changes will have a significant impact on UK-based funds and their principals and, in many cases, will result in a significantly higher tax liability. U.S. funds with operations in the UK and U.S. fund management executives living in the UK should take note.

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