Hedge funds flee UK tax clampdown

Date: Monday, December 3, 2007
Author: Steve Johnson, FT.com

Scores of London-based hedge fund managers are moving part of their operations to Switzerland in readiness for a proposed UK tax crackdown on non-domiciled residents, according to Kinetic Partners, an investment management consultancy.

London has become a popular base for the industry, with the city's 950 or so hedge fund firms managing about 80 per cent of European hedge fund assets.

ut according to David Butler, founding member of Kinetic, at least 40 per cent of the founders of the consultancy's 300-plus hedge fund clients are non-domiciles and they are reportedly getting increasingly jittery about the likelihood of a harsher tax regime.

"We are seeing literally dozens and dozens of hedge fund managers moving some of their operations, at least, to Switzerland," said Mr Butler. "About 40 [of Kinetic's clients] have done so and if the tax situation gets worse then the funds themselves would be prepared to move."

From next April, non-doms who have lived in the UK for more than seven years will face a £30,000 a year levy if they choose to keep their offshore income and gains out of the tax net. However, a greater threat to the hedge fund industry comes from proposals to crack down on offshore trusts that also allow non-doms to escape tax on their investments.

"Remove this [exemption] and the general view that is starting to prevail is that £30,000 is the thin end of the wedge," said Mr Butler.

He claimed that two of his clients had moved their entire operation to Switzerland to escape the clampdown. The others have reportedly moved 20-50 per cent of their operations, including part of their fund management and research activities, marketing and distribution.

"There will come a time when people are using the UK just for their finance and back office operations. The key value operations will move offshore."

Switzerland is said to have become popular as a destination because it is one of few major developed countries that also has tax breaks for non-domiciled residents.