Pep Pods from Cummings Pepperdine

Enticing investors into your fund with a tax efficient offering | with Claire Cummings and Priya Mukherjee

November 18, 2022 Claire Cummings
Enticing investors into your fund with a tax efficient offering | with Claire Cummings and Priya Mukherjee
Pep Pods from Cummings Pepperdine
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Pep Pods from Cummings Pepperdine
Enticing investors into your fund with a tax efficient offering | with Claire Cummings and Priya Mukherjee
Nov 18, 2022
Claire Cummings

Welcome to the Cummings Pepperdine podcast. In this episode we talk to Priya Mukherjee, Partner at Larkstoke Advisors, all about how to entice investors into your fund with tax efficient offerings.

Essential listening for the funds industry. ------------------------------------------------------------------------------

Cummings Pepperdine provide relationship-based holistic solutions linking law, tax and FCA compliance. Specialising in these three key areas allows us to offer clients a wide breadth of assistance to cater to their core business needs. Visit for more information.

For a transcript of this episode, please click here. 

Show Notes Transcript

Welcome to the Cummings Pepperdine podcast. In this episode we talk to Priya Mukherjee, Partner at Larkstoke Advisors, all about how to entice investors into your fund with tax efficient offerings.

Essential listening for the funds industry. ------------------------------------------------------------------------------

Cummings Pepperdine provide relationship-based holistic solutions linking law, tax and FCA compliance. Specialising in these three key areas allows us to offer clients a wide breadth of assistance to cater to their core business needs. Visit for more information.

For a transcript of this episode, please click here. 

[00:00:00] Well, thank you everybody for joining us for this podcast. Today we're talking about how you can structure your fund to gain more UK taxable investors by allowing them to take advantage of a more tax efficient investment regime. Particularly useful at the moment because it's actually just before the mini budget financial statement comes out from Jeremy Hunt and we are all waiting to see what he will do with capital gains tax, one of many taxes. 

So, to build on from that, again, thank you for joining. My name is Claire Cummings. I'm managing partner of Cummings Pepperdine, a law firm specializing in tax and compliance for the fund and crypto industries. And I would like to introduce you to my co-presenter , Priya, from Locke Stoke Advisors.

Priya, tell us all about you and all about Locke. [00:01:00] Thanks, Claire. It's great to be here today talking to you on this podcast. My name is Priya Mukherjee and I'm a partner at Locke Stoke Advisors which is a boutique professional services firm focusing on providing tax advisory services to asset managers. 

So, reporting fund status is one of the key service lines that we focus on in our business, and takes up about a third of our business.

Our key specialist area for us is advising funds and fund managers on UK reporting fund status. And there are also other areas, tax areas and accounting areas you advise on, which maybe we can do more of these podcasts and conversations to teach our listeners at other times.

But for now we are going to talk about how to invest in a fund with tax efficiency. And that is the reporting status, isn't it? So maybe we could just sort of start off and you could talk [00:02:00] about the issues that you need to deal with within a fund. So whether it's a new fund or a new share class, and I could quickly talk about how legally that's done.

So I think just very broadly speaking, where there is a UK individual investor investing in an offshore fund or a non UK fund, they can be taxed in one of two ways. So they can either be subject to income tax on when they realize their gains which is at 45% at the minute, and the other way they can be taxed is that of the 20% capital gains tax rate.

Now, which rate applies to them depends on whether or not they have elected to be within the reporting regime in the UK. So the reporting fund regime is an optional regime. So essentially what the regime does is taxes the UK investors on any income arising in the fund on an annual basis, but any capital that arises to them at the end when they redeem their [00:03:00] investment, that is subject to capital gains tax at 20%.

So that really is significantly advantageous, isn't it? So, you know, a 25% differential what's not to like about that. I think just one thing to pick up on is noting that this applies to a fund which has created a shared class and then makes the correct application. So, I mean, something we commonly do when we're setting up funds is with our clients, is start off asking

where your clients are, where your investors are, and what your investors will want. Because if you have got  tax paying investors, then this is something really to consider straight away. Because as a UK taxpayer, if you can choose between paying 20% or 45%, then you know, even if performance is down, frankly it can still make a huge difference, can't it?

Absolutely. So I think when investors are investing, I think a fund which does [00:04:00] not have reporting fund status will have to significantly outperform a fund that does. So there's a huge margin there for them to choose that. And I think one other point to note is HMRC publish a list of successful applicants.

For the UK reporting funds status, so as of now when I last checked, it was about 95,000 odd funds on there, and it's updated on a monthly basis. That includes funds that have UK reporting funds status, so it is a good screening mechanism for investors looking to invest in offshore funds so they can go on there and have a look at whether or not the fund does have reporting fund status, and choose accordingly.

Equally, investment managers, when they're marketing their fund to UK individual investors, they use that as a tool also to include in their prospects, but also to send them to that link to look at our reporting fund status and therefore we've got the tax regime. Yes. This is what you get.

And, so building on from that, it doesn't have to be the whole fund, which [00:05:00] complies that. It doesn't have to be the whole fund, which sort of offers this. The way it's done is that the position at law is that any class of shares has to offer its investors the same terms. So obviously if you have class of shares, which is only going to be investible by UK taxpayers, and it will

provide a lower return on taxes. Obviously the fund needs to create a share class for those, and this is done very simply on the setup of a fund. The share class will be referred to in the offering memorandum, and it will be dealt with corporately at all those stages of the fund, but I think it's important to notice when you're structuring it, even if you don't have those investors to start off with, the way that we always structure a fund is to allow

the directors to create new share classes at any time. Yes. Which means it's a very easy one to apply. So if you don't [00:06:00] want to go to UK taxable investors immediately for any number of reasons. And of course going to UK taxable investors is linked with the UK AI Fund and the requirements in there if you're not going to have any other UK investors.

So it's something that I think is worth pointing out. Those who aren't certain can always, as long as the offering memorandum is crafted correctly, and also the articles can set it up later, can't they? Absolutely. So, applications can be made for the share class itself.

So it's not a fund wide application for reporting fund status purposes. Each individual share class is treated as if it were its own fund. So when we do send out the application to HMRC, it would be on a share class level, and that share class would only have UK investors investing in the share class.

And it could also equally be operating where there’s several supporting series. Yes. [00:07:00] Within a share class. So, the application is at a share class level, and as you say, as long as the offering documents have been drafted correctly, we can always apply as and when the share class is launched.

And the share class opens up to UK investors, so it doesn't have to be at inception. It's as the fund grows and they open up a new checklist to UK investors, we can always apply then. Start with it, grow with it, whatever. And I think it's interesting what you were saying just then about series because it also, whether you have a share class with reporting fund states or not, makes no difference to the way that you structure your fees.

You can either have equalization or you can have series and you can apply whatever fee, whatever fees you decide are right for your market, for your investor base. Correct.  So can you tell me a bit about whether or not every fund can qualify or whether they have to meet certain conditions?

I think this goes to the heart of it being about the heart of [00:08:00] the investment strategy of the fund and whether what the fund is doing is investing or trading, and that can be quite a finely calibrated issue, can't it? Yes, absolutely. I think you've got it spot on. So it's not a regime that's beneficial to every single fund, irrespective of strategy.

So one does need to consider what type of strategy the fund is undertaking. Like you said, typically a fund that has an investing strategy. For UK tax purposes, and this goes back to the badges of trade and case law and looking at holding periods and so on. So typically a fund that has an investing strategy over a trading strategy, and this is purely for UK tax purposes, they are considered the typical fund for obtaining the reporting fund data.

So just to give you an example, if you are a fund that is, say a quant trade over a very high frequency trading [00:09:00] strategy, UK reporting fund status will not be beneficial for them purely because the way the reporting fund status calculations work. So we'll come to that in a minute. So you need to submit certain annual calculations to HMRC where you calculate your access, reportable income, those calculations, the way they work.

if you have a trading strategy, you'll end up paying a lot of income tax on your excess reportable income for the investor, which will not make reporting home status as well, so it's definitely something to think about before getting in. But something like, so for example, I have thought as we talked about something like long short equity, yes.

Community, macro credit. Those are the types of strategy which are more likely to be deemed acceptable by the revenue and also to be beneficial to the shareholders. Absolutely. So those are the sort of strategies that we typically see within and, I think if one looks at the list [00:10:00] of HMRC funds as well, that's a good sort of touchpoint to look at.

Various strategies that are on there to see. So all the type of strategies that are acceptable, but the ones you mentioned are exactly the ones that are typically beneficial for reporting fund status. Right. So tell me about what happens next. We talked a bit about the reporting that you have to make to the revenue, but could we start with how you go about talking to the revenue to see if somebody is eligible or not?

What's the information that you need? What do you ask investors to give you? So, just going back on that a bit, the application, the engagement typically is it's the investment manager who elects rather than the investor to apply for the regime. So it is typically in the UK there could be offshore as well?

So it is the investment advisor or investment manager who makes the decision to apply for reporting fund status and the application process. Fairly straightforward. We send HMRC the prospectus of the [00:11:00] fund or the offering memorandum along with an application, which has got technical questions along the lines of what elections to make for reporting fund status, how the fund is going to calculate its reportable income, any elections to make.

So, without going into too much technical detail, without, the application form covers a lot of information on the fund and then we send that off with a signature of the investment manager on it, and then we say, we are making this application along with the offering documentation.

Send it off to HMRC. And HMRC are fairly good with the turn around in terms of timing. I think, sorry, Claire. No, sorry. I think you're about to answer my question, which is what's the timing like, and do they ever come back with any further questions or is it a straight yes or no?

How does that work? It's typically a straight yes or no. I've not heard back. I think in my 10, 15 years of doing reporting front status we've [00:12:00] not heard back from HMRC because I think we do all of that legwork before we apply for a fund. So we have a conversation with the manager and we make sure that it's the correct strategy.

And then we've got all our ducks in a row before we make the application. So we make the application and HMRC usually come back saying your application has been successful and we've included you within the list of reporting funds. And then we go back and tell the manager, you're now on the list of reporting funds.

And then they can go and tell the investors and then what happens after that. So, reporting fund status has been granted. The markets always in compliance with FCA rules, UK, AI Fund, financial Promotions and so on. They get to the end of their first year's trading.

What happens then? What happens at that point? So then once they've held their first year end and sorry, I didn't mention this when I was talking about the application. There are very strict  [00:13:00] deadlines in terms of when you apply. So you need to apply for reporting fund status before the first year end of the fund,

or three months from when any interest has been issued in the fund. So where interest has been issued in the fund in the last three months of year end, you have a slightly extended deadline. So three months from when you've launched that particular share class. So once you've done that, you're in the regime, you've had your first year end, then you need to comply year on year with the reporting fund requirements.

What those requirements are is that you must send a certain pack of information to HMRC and do certain reporting to your investors within six months of year end. So say your fund has a 31 December year end. Yes. By 30 June the following year, you need to submit to HMRC, the following year. So your audited financial statements, your excess [00:14:00] reportable income calculation, which I'll come to in a minute.

And your report to participants. Report to your investors stating whether or not you have any access, reportable income, even where this is nil. And then you need to provide a declaration form signed by the investment manager saying that you've complied with the requirements and the shareholders that you report to, are they all shareholders or are they just the shareholders of the share class, to which the reporting regime applies. Correct. It's the latter. So it's only the shareholders of those specific share classes to whom the reporting regime applies. So there's an element of privacy for UK taxpayers? Absolutely. And there's nothing 

Prepare that in a way that it goes to in investors separately for each share class on a share class by share class basis. So you're not cross-sharing information across share classes and it can be emailed or put up on the website, but there's nothing too contentious on there [00:15:00] anyway. Okay.

And you were going to talk to us a bit more about how you calculate the excess reportable income, the ERI. So more about that. Because I think that's going to be, very useful for people to listen. I think that forms the key piece of financial calculation that goes into the reporting fund status annual compliance calculations.

So essentially your excess reportable income calculation. It takes all your revenue income and then takes away all your revenue expenditure from that, and then whatever you are left with and most expenses are deductible for these purposes, including your management fee, or the only exception is the performance fee, which is not deductible, and then you come up with a number, which is your reportable income.

Which then you deduct any dividends that you might have paid, and then the number you get at the end is your [00:16:00] excess reportable income, and that is reported back per unit to the shareholders who then have to pay income tax annually on that income arising in the fund. And any capital that arises to the fund is stripped out and taxed on that at the end of the life of the fund now, because there's all the revenue ex.

That's really important, isn't it? The income has to be there, because I think under the old regime, you used to have to pay tax as well every year. But here it's really important. You only pay capital gains when you redeem, you crystallize your investment. And because of the way the excess reportable income calculation works, it is often the case that because of all your deductible expenses, if you've got low levels of income, high levels of expenses, often your excess reportable income will be nil or very low.

So it is very unlikely that you will be paying income tax year on year on those in any case. But even if it is nil, you need to report that to your [00:17:00] investors as part of the compliance.  So in essence what we're saying is that if you have the right type of fund, so one that trades and invests or if you have a fund where this makes sense, so not a frequently trading high frequency trading type fund

then you can go to your UK taxable investor base and say, invest with us, you are unlikely to pay any tax during the year. It's going to be reported by the income tax and at the end of the life of the fund, or the end of your investment in the fund. Rather, you can take it out and the tax you pay will be 20%, not 45.

That's a huge quarter, 25% different. And just to bear in mind, if you do have excess reportable income, then you would be subject to income tax year on year. But that's likely to be fairly low if you've got the right type of [00:18:00] strategy anyway. Right? Well, I have to say, it all sounds extremely compelling.

I mean, as a UK taxpayer, where do I sign up? I think probably this podcast is, going to be available after we've had the Jeremy Hunt, Rishi Sunak budget on the 17th. So, there'll probably be something to come back as we approach, so December and Christmas at the moment, perhaps Priya, we could do another short podcast at the beginning of next year.

We could revisit it and then maybe invite our listeners to maybe come and see us. So what sort of one night in Mayfair, just pop in, have a quick drink, pick up the reins, and see if we can help people further in the new venture. I think that sounds great. I think given we've got an upcoming autumn statement later on this week, I think it's definitely worth doing a part two just to revisit some of those points and see whether [00:19:00] any of those taxes  get affected and, it'll be great to  touch base with.

People who'd like to hear more about it in person, over a drink in the year. Have,  a drink, get some specialized advice about your situation. Come assist. And in the meantime, we've also done a publication on this, which is out, it's on our website, it's on our LinkedIn pages. So we are giving our listeners some, fairly juicy initial info.

We'll come back again at the beginning of 2023 and hopefully we'll start meeting people in person after that as well. Priya, it's an absolute pleasure. Let's just give our website so that people can find us  if they want to. So Cummings, Pepperdine is very simply

Priya, how about Locke? Locke Stoke Advisors are simply (?) They're both very simple. Thank you very much, Priya, for joining me [00:20:00] today. Thank you very much for our listeners, and we hope very much to see you all in person soon. Yes. thank you, Claire. Thank you. Thanks everyone. Bye bye.