Press Room

6 Nov 2019

The UK – The Investment Manager Exemption: Trading v Investment

The UK has a long and proud history of being a centre for the fund management industry. The regulations and the tax system are designed to attract non-UK investment funds to use UK-based fund managers. The UK even goes so far as to guarantee that regulated foreign investment funds will not be considered to be UK tax resident (Andrew was part of the team that introduced the amendments to s.363A Taxation (International and Other Provisions) Act 2010 in 2014), even if their central management and control abides in the UK (you can tell that he also had responsibility for company residence as he insists we use the word “abides”!).

Section.363A took care of one route by which foreign investment funds could be within the UK tax net, but there is still UK tax due if a non-resident has a taxable presence in the UK; usually in this context, having a UK agent who carries on the fund’s trade in the UK – AKA a fund manager. If it were possible for a fund to be subject to UK tax because of the actions of its UK-based fund managers, all non-UK funds would quickly move to firms outside of the UK, destroying the fund management industry nearly overnight.

To stop this happening the UK has the “Investment Manager Exemption” (IME), which ensures that the UK taxation of any income of a non-UK fund from investment transactions carried out by independent fund managers in the UK, is limited to any withholding tax (so nil for any foreign income or UK dividends). We’ve highlighted “independent”, as that can be overlooked.

The aim of the IME is to reduce the UK’s tax take on these investment transactions, so people use UK fund managers and, if you read HMRC’s guidance, it is clear that the policy is to enable as many funds and their managers to get within the exemption as possible.

Et tu brute?

However, HMRC also has a long and proud tradition of taxing fund managers until their pips squeak. From initiating many inspectors into the dark arts of transfer pricing around the turn of the century, asking them to look at the fees paid to the UK-based managers (and to be fair to HMRC, a number were booking only 0.5% in the UK out of the 2% and 20% the fund was paying), to the recent disguised investment managers fees rules, the managers themselves have been scrutinised very closely.

To tax or not to tax

A recent case required us to look at the IME in detail. The investment fund in question started off well within the safe confines of the benign HMRC treatment, non-resident funds with the IME for the UK-based investment managers. Several years down the line they are now potentially at risk (out of this protective bubble), of seeing the other face of the Revenue.

The client was a “normal” investment fund, based outside the UK (in tax neutral jurisdictions), with many external investors and UK-based fund managers who had “skin in the game” by investing alongside their clients. Indeed, if they hadn’t made these investments, no-one would have put their money into the funds. This is all catered for by the IME and it allows fund managers 18 months to find enough investors to get within the exemption.

The potential problem arises as a result of the funds being wound down, or to be more precise the funds are closed to external investors and, indeed, the external investors have now redeemed their investments, leaving behind one fund made up, mainly of the fund manager’s own investments. This means that the relationship between the fund and the manager is now outside of the IME. Instead of a UK-based fund manager making investment decisions on behalf of an independent fund, the UK-based fund manager is making investment decisions, effectively for their own money.

All’s well that ends well

However, for the IME to be in point, the fund has to be trading and this is the usual get out of gaol free card.

Whether a fund is trading is a question of fact, one that the legislation gives next to no help with, and that the courts and a Royal Commission have spent many hours deliberating, leaving behind those nine “badges of trade”. Helpfully, the UK courts have acknowledged that the badges are of little help in deciding if someone is investing or carrying on a financial trade.

The Courts have, though, also said that the active management of investments is not a trading activity. So, where does an investment become a trade? We believe that there are three occasions, the first is when the person holds themselves out as a market maker, offering to both buy and sell a class of investments from all comers. The second is high-frequency traders, as it is a bit difficult to argue that you are holding shares as an investment if your holding period is a nanosecond. The final occasion is where the “investment” strategy is to “play the market”, looking for shares that are about to rise or fall in value and buying or selling appropriately.

In this third scenario, the investor is looking to make a profit out of the turnover of the relevant class of investment. Whereas, if an investor buys shares to hold, aiming to make a long term gain, and receive the dividend or interest income, then even if they “actively manage” the investments by selling poorly performing shares, buying more of well performing ones etc. will not lead to a trade. To use an analogy, it is the difference between someone surfing eBay to buy items they believe they can sell at a profit, and someone who surfs to buy items they like the look of but have a habit of selling items they get bored of, or with the intention of making room for their new purchases!

Some funds will be trading with a few hints of investing, but many more will be investing with a few hints of trading, and this is the category our client is in.


Although a fund taken “in-house” is likely to be outside of the IME, other anti-avoidance rules have to be considered, such as transfer of assets abroad or the new profit fragmentation rules – but that is a tale for another day.

For more information please contact Andrew Parkes on +44 20 7242 5000 or

Julian Nelberg

Julian is Head of the Private Client group at Andersen LLP. His clients include international high net worth individuals, senior executives, trusts and companies.

Email: Julian Nelberg