FAQs - Hedge funds & private equity
What is “distributor status”?
Distributor status determines the tax treatment of gains arising following disposal of shares in offshore funds. Broadly speaking, a gain arising from a fund with distributor status will be assessed as capital, with the availability of taper relief and the annual exemption and the flat rate of capital gains tax of 18%., while a gain from a fund without distributor status will be assessed as income.
A 'distributor fund' is an offshore fund that distributes the whole, or substantially the whole, of its income. It also has to meet certain other conditions relating to its assets and investments.
It is necessary for the fund to apply to HM Revenue & Customs (HMRC) to obtain this status.
If you require further guidance on the above, do contact Smith & Williamson. We are also able to advise on applying for this status and the tax implications of investing in either classification of fund.
The 2009 Budget did announce that legislation will be evoked which will replace the "distributor status" test with a "reporting fund" requirement. Again we can advise on the conditions for this status.
When is a share a “business asset” for taper relief purposes?
Taper relief is available for assets disposed of before 6 April 2008.
If a share qualifies for the business asset rate of taper relief, the effective rate of tax on the gain arising from disposal of the share is only 10% after two years of ownership as opposed to the full 40% marginal rate.
As at 20 September 2007, a share is a business asset for taper relief purposes in the following circumstances;
a. If it is a share in a unquoted trading company
b. If it is a share in a quoted trading company of which the shareholder is an officer or employee
c. If it is a share in a quoted trading company of which the shareholder holds 5% or more of the voting rights
d. If it is a share in a non-trading company in which the shareholder is an officer or employee holding less than 10% of the company’s issued share capital or voting rights and less than 10% of the rights to income or assets on winding up.
The rules above have been in force for shares acquired after April 2004. Different definitions apply for shares acquired before this date and Smith & Williamson are able to advise on the status of shareholdings affected by this change in rules. We are also able to advise on ways to mitigate any tax arising on disposal.
How does a member of an LLP pay income tax?
A member of an LLP is assessed on the same basis as a partner of a partnership. The member will pay income tax on their share of the profit from the LLP in the year. As it is a share of the profit, it may be a different to the amount distributed to the member.
Tax will be applied to the profit at the member’s marginal rate (usually 40%). The tax is payable on the 31 January following the end of the tax year. For example, for the 2007/08 tax year, the tax will be due on 31 January 2009.
A member of an LLP is also likely to be required to make payments on account. These are payments made in advance of the next year’s liability based on the previous year. The payments are made in January and July and the tax due on each date is equal to 50% of the previous year’s liability. A balancing payment is then made on the following January if the tax liability is higher. Should the tax liability be lower than the payments on account made, a repayment is issued.
Should a member expect their income share to be lower than in the previous year, it is possible to claim to reduce these payments on account. Care should be taken as HMRC charge interest if payments on account are reduced and a balancing charge is due.
There is no requirement for the LLP to deduct or withhold tax when making payments of income to the member. However, often an LLP will reserve the tax due by members by only distributing 60% of the income entitlement. This is dependent on the specific LLP and the specific LLP agreement.
If you require further guidance on the above, please contact Smith & Williamson. We are able to provide a full compliance service for the LLP and the members.
What is Entrepreneurs' Relief?
Entrepreneurs' Relief will apply to people who sell a business and also directors/employees who own more than 5% of the shares in a trading company.
In broad terms, the first £1 million of gains on a disposal as described above will suffer capital gains tax at 10%. The asset must have been held for at least a year. The limit is a lifetime allowance covering multiple disposals. Trustees can benefit from this relief, as long as a life interest beneficiary qualifies as the entrepreneur.
