Guernsey offers glut of tax-efficient funds to UK investors
Guernsey funds offer UK-domiciled investors the opportunity to invest in assets they could not normally buy and help them manage taxes including income and capital gains
Funds under management and administration in Guernsey reached a record high of nearly £115bn by June this year, a growth of 40% year on year, and a number of fund managers, particularly in the alternative sector, have established a presence on the island.
But while much of Guernsey's fund business growth has been institutional, there are exciting developments that will be of interest to financial intermediaries and UK retail investors.
Retail Guernsey funds have traditionally been Guernsey Class A schemes, the equivalent of UK authorised funds. They are open-ended and able to be marketed to international investors in most jurisdictions, with distributor status for tax reasons and marketing rules that allow them to be advertised off the page.
However, over the years there have been arguably more open-ended B schemes and closed-ended vehicles are now being sold to retail investors through advisers and via life assurance platforms, as well as through structured or guaranteed products. They are also being sold directly subject to the restrictions and rules surrounding direct participation. This reflects the weighting of such funds in the island.
Many UK fund sponsors or managers have set up private equity funds or Class B schemes in Guernsey, and these attract UK investors either directly or through other schemes such as a fund of funds - sometimes via a UK fund that feeds into the Guernsey fund. However, the feeder vehicle which feeds into a Guernsey fund may restrict how much it participates as a pure strategy play.
However, this provides UK investors with the opportunity to participate in the specialist structures and strategies that are more typically based offshore, for example, hedge funds, commodity funds and emerging market funds. It must also be remembered that traditional vanilla fund structures are managed from the island.
Property funds have also been a boom area for Guernsey over many years and continue to be, but one tends to see more institutional and pension investment. Although some UK investors participate directly the majority do this via institutional schemes.
Typically property funds have a high entry level of, say, £100,000 or even £1m, however lower entry level property funds exist for mass market investors, with minimum investments of between £1,000 and £5,000. For example, a fund of this type is being marketed by a financial services institution to its existing client base. It was set up as a class B scheme so that it did not need to negotiate the hurdle of off the page advertising.
In general Guernsey property funds have been a tremendous success and potentially have some advantages over UK Reits. In times of crisis, as well as boom times, bricks and mortar has always been an asset class that people can understand. They may be complex structures but property funds have a secure feel about them and are particularly suited to long-term investment.
The use of an offshore property fund mitigates certain tax liabilities including property sales tax, while UK Reits and sometimes other UK domiciled funds are liable to such taxes. A recent root and branch review of Guernsey's legislation and regulation relating to the funds industry has resulted in some recommendations designed to make Guernsey an easier place to do business. This included a review of the current A Class scheme rules and a proposal to create a Ucits equivalent product that could be distributed throughout Europe.
If the latter is developed promptly it could well lead to a boom for the island because of the difficulties that Ucits III has experienced during its passage through Europe. It is very positive for Guernsey to have a European accepted distribution method. It will put us on more of a level playing field with competitor jurisdictions such as Dublin or Luxembourg, and give promoters and investors further choice, which can only be good for Guernsey. At present, it is possible to distribute both Class A and Class B Guernsey schemes in Europe but this has to be structured and approved on a country-by-country basis which is very labour intensive.
While Guernsey class A scheme rules emulate those of the UK authorised scheme, the former benefits from being offshore. The advantages of an offshore fund include its tax efficiency, for example, certain structures give investors flexibility in managing UK income tax and capital gains tax liabilities.
Guernsey is part of an international offshore community so it is one of many choices open to UK resident investors. However, Guernsey's geographical position relative to the UK mainland and continental Europe, and its time zone, language, political stability and financial services infrastructure, together with its special relationship with the UK, make the island a very convenient place to do business.
Additionally, with many UK building societies having established an offshore banking presence in Guernsey the island's reputation has been further enhanced in the eyes of UK investors.
The island has a special relationship with the UK because although Guernsey is independently governed and is not part of the UK or the EU, it is a crown dependency, so the UK government has a certain amount of influence. It is often stated that a significant amount of the value of the funds that come to Guernsey inevitably finds its way back to the City.
Many of the products I have referred to are listed on the Channel Islands Stock Exchange (CISX), which is recognised by the UK Financial Services Authority, the Revenue & Customs and the Securities and Exchange Commission, and it is another way in which private investors can participate in Guernsey funds. Although many of them are listed for technical reasons, there is no reason why they cannot be traded by investors and this is something that the CISX is eager to encourage. For example, there is a daily dealing property fund in Guernsey with institutional and retail share classes which can be invested in from the UK through financial intermediaries.
Furthermore, closed-ended structured funds, for example, are able to issue preference shares for a retail audience and through a listing on the CISX they offer Isa and Pep eligibility.
Guernsey has built up a track record that is second to none for creating investment products over more than 40 years. Working in conjunction with UK magic circle lawyers we have our own sophisticated infrastructure of legal, accounting and administration services. This experience, combined with the strong track record, has made us a finance centre of choice for such structures.
With a strong spirit of innovation, and promoter, regulator and industry practitioners working together to focus on attracting more investors, there is every reason to expect that Guernsey will have a strong offering for UK investors for many years to come.Key points
Many UK fund sponsors and managers have set up private equity funds or Class B schemes in Guernsey either directly or through a fund of funds, sometimes using a UK feeder fund.
This gives UK investors the opportunity to participate in the specialist structures and strategies that are more typically based offshore, for example, hedge funds, commodity funds and emerging market funds.
Guernsey class A scheme rules emulate those of UK authorised schemes but also benefit from being offshore, meaning certain structures give investors flexibility in managing UK income and capital gains tax.
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