Investing in PE and UK tax

george4064

If I were to make a commitment to a Private Equity fund and hold in a GIA, what tax would I have to pay (if any) on the distributions the fund will make?

jimjames

The same as any other investment so CGT or income tax depending how it fits with your other income and investments.

george4064

jimjames said:

The same as any other investment so CGT or income tax depending how it fits with your other income and investments.

Since distributions from the fund will be from exiting underlying investments, I'd expect they'd be treated as capital gain and therefore CGT is applicable.

Does anyone know if my understanding is correct?

Also, I know there are exemptions from certain CGT and income taxes with investments. Would a Buyout PE fund qualify for any of these?

wmb194

george4064 said:

jimjames said:

The same as any other investment so CGT or income tax depending how it fits with your other income and investments.

Since distributions from the fund will be from exiting underlying investments, I'd expect they'd be treated as capital gain and therefore CGT is applicable.

Does anyone know if my understanding is correct?

Also, I know there are exemptions from certain CGT and income taxes with investments. Would a Buyout PE fund qualify for any of these?

Or a distribution may just be a dividend. It should tell you what type of distribution it is. Which fund? Is it a VCT?

Hoenir

george4064 said:

jimjames said:

The same as any other investment so CGT or income tax depending how it fits with your other income and investments.

Since distributions from the fund will be from exiting underlying investments, I'd expect they'd be treated as capital gain and therefore CGT is applicable.

That depends on how the distribution is made. A return of capital has to be dealt with in very specific ways. 

george4064

It's a UK/European mid-market Buyout Fund, so I doubt portfolio companies will be paying dividends and distributions will only be made after an exit.

wmb194

george4064 said:

It's a UK/European mid-market Buyout Fund, so I doubt portfolio companies will be paying dividends and distributions will only be made after an exit.

You can't be more specific? If the distributions are made in the course of the fund's business then they're likely to be dividends. It won't necessarily matter that the cash comes from making a capital gain.

george4064

wmb194 said:

george4064 said:

It's a UK/European mid-market Buyout Fund, so I doubt portfolio companies will be paying dividends and distributions will only be made after an exit.

You can't be more specific? If the distributions are made in the course of the fund's business then they're likely to be dividends. It won't necessarily matter that the cash comes from making a capital gain.

Thanks for your help, but I'm not sure what other info I can provide?

The Buyout fund hasn't launched yet, but there have been previous vintages.

wmb194

george4064 said:

wmb194 said:

george4064 said:

It's a UK/European mid-market Buyout Fund, so I doubt portfolio companies will be paying dividends and distributions will only be made after an exit.

You can't be more specific? If the distributions are made in the course of the fund's business then they're likely to be dividends. It won't necessarily matter that the cash comes from making a capital gain.

Thanks for your help, but I'm not sure what other info I can provide?

The Buyout fund hasn't launched yet, but there have been previous vintages.

What are the names? If this new one is going to be similar to the others it might be possible to look up how they operate(d) and make some educated guesses.

wmb194

[Deleted User] said:

george4064 said:

If I were to make a commitment to a Private Equity fund and hold in a GIA, what tax would I have to pay (if any) on the distributions the fund will make?

I suspect most people would not be able to invest directly in a PE fund (unless you are an employee/member of the adviser).  But let's assume you can, as you will invest via tax transparent vehicles you won't pay tax on the distributions but will pay tax on your share of the underlying income and gains (hopefully most of which will be distributed to you soon after the cash is realised).  In more (but very much simplified) details ...

To invest in a typical PE fund you'd normally make contributions to an LP (e.g. an English LP).  The LP would invest in equity and shareholder loans in the companies it invests in.  The LP is transparent for UK tax and so you are taxed on what happens below the LP rather than what cash you get. So you are not taxed on money distributed to you, but things that happened that led to that money being capable of being paid to you.

From a tax perspective, you would effectively get a combination of (i) a tax-free return of your contribution (e.g. following a refinancing and which would not taxable), (ii) interest (e.g. paid on the shareholder loan and taxable), (iii) dividends (e.g. on preference shares that receive a dividend and taxable), and (iv) capital gains (e.g. on disposal of equity). 

You are likely to also have dry tax charges (e.g. because UK tax is due when income and gain arise, not when distributed (e.g. because there's ascertainable deferred consideration), and also because income is used to pay expenses that aren't deductible).  It gets more complicated when, for example, the underlying investments are outside the UK (e.g. there may be some more dry foreign tax charges, some foreign tax credits, etc).

If you are an employee/member who gets carry then it's complicated.  But it's basically taxed on the higher of (i) as described above or, (ii) at the 18%28% CGT rate or income tax plus NIC rates (depending on whether your investment is an ERS and the weighted average holding period). 

Or it could just be an investment trust and it'll be nice and straightforward.

george4064

wmb194 said:

[Deleted User] said:

george4064 said:

If I were to make a commitment to a Private Equity fund and hold in a GIA, what tax would I have to pay (if any) on the distributions the fund will make?

I suspect most people would not be able to invest directly in a PE fund (unless you are an employee/member of the adviser).  But let's assume you can, as you will invest via tax transparent vehicles you won't pay tax on the distributions but will pay tax on your share of the underlying income and gains (hopefully most of which will be distributed to you soon after the cash is realised).  In more (but very much simplified) details ...

To invest in a typical PE fund you'd normally make contributions to an LP (e.g. an English LP).  The LP would invest in equity and shareholder loans in the companies it invests in.  The LP is transparent for UK tax and so you are taxed on what happens below the LP rather than what cash you get. So you are not taxed on money distributed to you, but things that happened that led to that money being capable of being paid to you.

From a tax perspective, you would effectively get a combination of (i) a tax-free return of your contribution (e.g. following a refinancing and which would not taxable), (ii) interest (e.g. paid on the shareholder loan and taxable), (iii) dividends (e.g. on preference shares that receive a dividend and taxable), and (iv) capital gains (e.g. on disposal of equity). 

You are likely to also have dry tax charges (e.g. because UK tax is due when income and gain arise, not when distributed (e.g. because there's ascertainable deferred consideration), and also because income is used to pay expenses that aren't deductible).  It gets more complicated when, for example, the underlying investments are outside the UK (e.g. there may be some more dry foreign tax charges, some foreign tax credits, etc).

If you are an employee/member who gets carry then it's complicated.  But it's basically taxed on the higher of (i) as described above or, (ii) at the 18%28% CGT rate or income tax plus NIC rates (depending on whether your investment is an ERS and the weighted average holding period). 

Or it could just be an investment trust and it'll be nice and straightforward.

It's not an IT. Previous vintage of this fund is: https://www.inflexion.com/funds-and-investors/buyout/