Note:
- This information is for background purposes only and cannot be relied on to be accurate or complete. This information does not constitute advice on taxation. Any such advice should be sought from a professional tax adviser.
- The HMRC and FSA have indicated that the rules governing the sale and marketing of Hedge Funds to retail investors are likely to be changed later this year.
Key Facts at a Glance
- All profits from Hedge Funds are treatee as income by the Inland Revenue and taxed accordingly.
- Profits are specifically treated as Schedule D Case VI income and consequently difficult to mitigate.
- Losses may be offset more simply; against profits from foreign exchange transactions and other forms of capital gain.
Investors may structure their investment, optimising the taxation regime to their personal circumstances in the following ways:
Offshore Bonds
- Investment may be made in an offshore bond through an insurance company, purchasing a Single Premium Life Insurance Policy.
- Allows the investor to draw down up to 5% of the value of the investment annually without incurring a taxable event as this is deemed to be capital repayment.
- Taxation of all profits is deferred until the bond reaches maturity. This allows gross compounding which becomes a cumulative advantage over the life of the bond.
- Profits at maturity will be subject to income tax but by that time the beneficiary may be in a lower tax band or non-resident.
- Redemption and reinvestment of proceeds without creating a tax charge liability may be done at will within the bond wrapper, so investment flexibility is maximised. Tax is only payable once the bond reaches maturity or is deliberately redeemed.
Self Invested Pension Plan (SIPP)
- A SIPP allows the policyholder/beneficiary to exercise full control of the pension fund and invest in a wide range of qualifying investments. If structured appropriately, a fund of hedge funds can become a qualifying investment.
- Within the pension fund returns are free from any tax.
- Nearing retirement the policyholder has a flexible set of retirement options, including lump sum withdrawal, drawing income and varying the timing of annuity purchase.
Small Self Administered Scheme (SSAS)
- Similar to a SIPP.
- Policy is targeted at directors of private limited companies and provides a greater degree of control and flexibility over retirement provisions.
- Like a SIPP, the investment is held under pension trustees.
- Fund returns are free from tax.
Direct Investment
- Investment may be made directly avoiding the administration costs of bond / pension wrappers.
- Tax planning will however be required to minimise tax on redemption, this may restrict flexibility by dictating the timing of any redemption.