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Will hedge fund managers flee the UK?

Date: Wednesday, May 20, 2009
Author: Hedge Fund Journal

George Bull, Head of Tax at accountancy firm Baker Tilly, analyses whether hedge fund managers are likely to leave the UK to counter the recent changes in taxation announced in the Budget:

"Advances in technology and the emergence of the virtual office means that skilled hedge fund managers who rely on personal flair and knowledge can operate virtually anywhere, regardless of the location of the business itself, but the real issue concerns fiscal residence and where the profits are generated. And for those without strong ties to the UK or who are used to a global lifestyle, transferring to another jurisdiction presents few problems, provided they are prepared to sever the ties that give them a permanent attachment to the UK.

"However, for individuals, the first consideration is the rate of tax that will actually be payable. For those taxable under capital gains tax on carried interest, the rate of tax will remain 18%. The 50% income tax will only bite into profits taxable as income. The amount of the profit (the carried interest) that can be regarded as capital is not objectively measurable and the increasing differential in tax rates may give cause for concern that current practice may be revisited.

"Regarding corporate vehicles, the UK tax rates are no worse than average. The tax incentive to move has been in place for some time now and recent changes are unlikely to harm the UK’s attractiveness. In any event, there are a range of anti-avoidance measures that enable the UK to collect its fair share such as transfer pricing and rules relating to controlled foreign companies.

"However, we come back to lifestyle factors. Links involving family, in particular children’s schooling and maintenance of a family home here would result in great difficulties for anyone making regular visits to the UK. Similarly anyone addicted to the joys of the English summer season who keeps a pied-à-terre here would have difficulty establishing non-residence."