Fund Management

SGH, Lyxor Offer UK CGT Benefits

Wendy Spires 26 November 2008

SGH, Lyxor Offer UK CGT Benefits

As UK’s high earners were hit hard by an income tax rise proposed in the Pre-Budget Report, making Capital Gains Tax even more attractive to high net worth investors, tax efficiencies are high on the agenda, and hedge funds are now finding ways for their investors to achieve them.

In this week’s Pre-Budget Report, UK finance minister Alistair Darling proposed a new 45 per cent tax band on those earning £150,000 ($227,527) or more, rising from the current 40 per cent.  The tax hike, which is scheduled to come into effect in 2011, is joined by proposed restrictions on the personal tax allowances of people earning £100,000 or more.

In comparison, the CGT flat rate of 18 per cent has significant appeal.

Due to a range of issues, such as domicile preference, hedge funds have historically shied away from tax planning issues.  But now, with the introduction of products designed for this purpose, more hedge funds investors are able to benefit from their profits being treated as capital gains. 

“Capital Gains Tax is probably even more attractive, if it wasn’t already; the one thing that many hedge fund investors miss out on is the ability to keep returns as capital rather than income gains that they currently achieve from most funds,” said Christina Ross, head of financial planning at SG Hambros, at a briefing this week.

One offering which addresses this issue of tax treatment are Lyxor Notes, developed by SG Hambros.

Lyxor, an asset management subsidiary of Société Générale, offers managed accounts across a diversified platform of 150 hedge funds.   Notes in these funds are designed to give investors exposure to the underlying assets of the fund, along with capital protection at maturity. 

The Notes are structured in such a way that they can be customised to achieve CGT treatment.  With the addition of a warrant, Lyxor Notes count as excluded indexed securities, and as such profits made by their redemption would be assessed under CGT.

The Notes, which were developed by SG Hambros one year ago, are proving popular with investors, and not only because they offer the lower rate of 18 per cent taxation.  

It was also pointed out that they offer an alternative to close-ended funds or offshore companies, which as Ms Ross highlighted “often add other layers of cost.”

Another significant advantage offered by such products is that investors can offset their profits with unused losses – something which is particularly attractive given the economic traumas seen over the last year.

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