Offshore PE investors dodge tax hike

Realisations made by private equity funds in investments structured offshore will be treated as capital gains and not as offshore income, confirmed UK tax authorities earlier this month. 

 
Without the exemption, UK-based private equity investors and GPs potentially faced an income tax rate as high as 50 percent on their returns generated from investments held through offshore entities. The UK capital gains tax rate for high earners is currently 28 percent. 

 
To gain the exemption, at least 90 percent of the offshore special purpose vehicle’s (SPV) assets must be in unlisted trading companies. The exemption originally stated the SPV had to maintain the 90 percent threshold right up to the date of disposal, but has since relaxed the standard to allow assets to be realised before then even if doing so would mean the SPV dipped below the 90 percent floor.  
 
 The issue arose after the UK government devised new rules in late 2009 to clamp down on investors avoiding tax through the use of offshore investment vehicles. The revisions could have potentially captured private equity funds using offshore SPVs to structure their investments, which the new offshore funds tax regime will cover. 
 
“It was unfair for private equity to potentially be caught by these rules as there were generally no issues under the old UK offshore fund tax regime,” said Bradley Phillips, Herbert Smith’s head of tax .
 
“The revised exemption demonstrates the industry’s lobbying power and also UK tax authority’s ability to listen and understand how private investments are structured,” he added.