Non-residents trading in the UK: through UK investment managers, brokers or Lloyd’s agents: investment manager exemption: conditions
Five conditions to be met
The investment manager exemption can only apply in relation to ‘investment transactions’ (defined at INTM269070) carried out for the non-resident by the UK investment manager.
There are five conditions, all of which must be met before the investment manager exemption can apply (ITA07/S835M and CTA10/S1146). These are as follows:
- The investment manager must be carrying on the business of providing investment management services.
- The transaction must be carried out by the investment manager in the ordinary course of the investment management business.
- The investment manager must act in relation to the transaction on behalf of the non-resident in an independent capacity. This is called the ‘independence test’ and is considered by reference to the legal, financial and commercial characteristics of the investment manager’s relationship with the non-resident. See further guidance at INTM269090 and INTM269100
- The investment manager, together with any persons connected with the investment manager (as defined at CTA10/S1122 for corporation tax and ITA07/S993 and S994 for income tax), must not be beneficially entitled to more than 20% of the taxable profits of the non-resident from transactions carried out through the investment manager. This is called the ‘20% rule’. See the further guidance at INTM269110 to INTM269150.
- The remuneration that the investment manager receives in respect of the transaction is not less than the customary amount for that class of business.
The effect of these conditions is to exempt only those investment managers who are acting in the ordinary course of their business on arm’s length terms and are independent of the non-resident.
Sometimes a non-resident appoints an investment manager overseas who in turn appoints a UK investment manager, often its affiliate, to manage the investment of all or part of a portfolio. In those circumstances the legislation is applied as between UK manager and the non-resident on the basis of looking through the overseas manager. The fee income retained by the overseas investment manager should do no more than reflect the work carried out offshore, if any. (See INTM269170 and INTM269175 in relation to the customary remuneration test.)