Recent changes to the remittance basis of taxation of non-UK domiciled resident individuals coupled with the introduction of the UK reporting fund regime with effect from 1 December 2009 have produced an interesting outcome for US domiciled individuals resident in the UK. Broadly such individuals are now subject to UK tax on worldwide income and gains unless they elect subject to UK resident timeframe and eligible conditions to retain the remittance basis of taxation. There is an incentive for US fund managers of US Regulated Investment Companies (known as 40 Act Funds) to apply to join the UK reporting fund regime so that US domiciled UK resident investors can avail themselves of the more favourable capital gains tax treatment on redemption of shares in such offshore funds. The UK tax rates are 18% and/or 28% on realised capital gains above the UK annual exempt amount. This compares favourably with similar rates of US capital gains tax. For US tax efficiency US 40 Act funds have to distribute at least 90% of their net investment income and short term gains and over time long term gains.
If such investors invest in other offshore funds say in Luxembourg or Dublin then they may face punitive rates of US tax circa 50% upwards on their investment income and gains unless the underlying fund is a Qualifying Electing Fund (QEF). The administrative cost of making such an election can be commercially unviable unless the fund has significant US investors. In practice many funds choose not to make a QEF. However, a US 40 Act Fund does not fall within the scope of QEF.
Therefore, it is recommended that US fund managers who want to market to US investors in the UK make an application to join the UK reporting fund regime. HMRC accept that US GAAP is of equivalent standard to IFRS and UK GAAP. The reported investment income from such funds is subject to UK income tax at the investor’s marginal rate of UK tax. Distributed net short term and long term gains by the fund are subject to the UK marginal rate of capital gains tax mentioned above.