What a hedge fund leaves a UK investor
The full cascade of management fee, hurdle, high-water mark and performance fee, then UK tax on income and gains, then the gross return the fund would need for you to keep what you want.
By Eldar Edmond Grady, CEO, PPLI.com · Research checked 23 September 2026, model corrected 20 October 2026
The reported figure stops before your tax
A hedge fund reports its return net of its own fees. Your tax comes after that, and for a UK resident it depends on how the return arrives: income at the savings rate, realised gains at 24%, and gains on a non-reporting offshore fund taxed as income.
Inside a policy the tax layer is deferred, but only where the fund counts as permitted property or is picked by an insurer-appointed manager you do not direct; the manager's fees are due either way. Outside a policy the whole tax layer applies, and the instrument shows it year by year.
£1,000,000, one year, 10% gross, 2 and 20
No hurdle. The fund pays its own fees first, so UK tax is measured on the £64,000 that is left, not on the £100,000 the strategy earned. One year, one position, the whole result taken as a gain on the units, the £3,000 annual exempt amount ignored: a narrow illustration, not a client result.
Value after fees 1,000,000 + 100,000 − 20,000 − 16,000 = £1,064,000
Gain on the units, after the fund's fees £64,000
Reporting fund, CGT 24% on 64,000 tax 15,360 kept £1,048,640
Non-reporting fund, 45% on 64,000 tax 28,800 kept £1,035,200
Non-reporting fund, higher rate 40% tax 25,600 kept £1,038,400
Transparent fund: your share of the fund's own income and realised gains, as they arise
15,360 if the result is all gain; 28,800 if it is all interest at 45%Choose the fund status in the instrument and it applies these rules. The gap between a reporting and a non-reporting fund here is £13,440 on one year and one position, and it grows with the gain. A fee you pay your own adviser is a separate cost: it comes from taxed money and reduces none of these figures.
How the X-Ray works
The fee waterfall
Management fee on the opening value; performance fee on the profit after it, above the high-water mark and any hurdle (hard or soft).
Two kinds of fee
The management and performance fees are the fund's own costs. They reduce its value and its reported income, so everything that follows is measured after them. A fee you pay an adviser yourself comes out of taxed money and is not deductible; the instrument shows it on a separate line.
Tax, by fund status
A reporting fund is taxed each year on its reported income at the savings rate, and on the gain on the units at the CGT rate when the position is closed; the fund's own trading inside the portfolio is not taxed to you. A non-reporting fund is taxed only when the units are sold, on the whole gain at the savings rate, as an offshore income gain. A transparent fund is taxed on its own income and realised gains as they arise, at the savings rate and the CGT rate respectively.
Solving backwards
The required gross return is found by trying gross returns until the net result matches your target. It is the same model run in reverse.
Common questions
Are the fund's fees deducted before tax?
Yes. The fund pays its management and performance fees out of its own assets, so the reported income of a reporting fund, which starts from the fund's total comprehensive income in its accounts, and the gain on your units are both measured after them. What is not deductible is a fee you pay an adviser yourself: that comes from taxed money, and the instrument keeps it on a separate line. Until 20 October 2026 this page modelled the fund's fees as non-deductible, which overstated the tax and with it the case for holding the fund inside a policy. That has been corrected.
Which fund status should I choose?
HMRC publishes a list of reporting funds. If the fund is on it, choose reporting. If an offshore fund is not on it, choose non-reporting. Choose transparent for a fund that UK tax treats as a partnership or otherwise looks through, so that its income and gains are yours as they arise. If you are not sure, the fund's offering document or its administrator will say.
Instruments and related reading
Private credit real yieldThe stated yield against the yield on committed capital after taxOpen →Alternative investment intelligenceGross return against what the terms leaveOpen →Tax drag calculatorThe annual tax cost, asset class by asset classOpen →Investment flexibilityPermitted property and insurer-appointed managersOpen →The personal portfolio bond rulesWhat a UK-workable policy may holdOpen →PPLI.com is not authorised by the Financial Conduct Authority and does not give personal advice. This is general information about UK law, not an invitation or inducement to enter into any insurance or investment contract. Policies issued by insurers outside the UK are not protected by the Financial Services Compensation Scheme (unless written through a UK branch).
The authorities this page relies on
HMRC helpsheet HS265
A gain on disposal of a non-reporting offshore fund is normally an offshore income gain, charged to income tax. A gain on a reporting fund is charged to capital gains tax. gov.uk, HS265
IFM12146 and IFM12524
An investor in a reporting fund is taxed on sums distributed and on the undistributed excess reported for each unit, and on the gain on the units when they are sold. The computation of reportable income starts from the fund's total comprehensive income under reg 63 of the Offshore Funds (Tax) Regulations 2009, so the fund's own expenses have already come off. gov.uk, IFM12146 gov.uk, IFM12524
Income tax, savings and dividend rates
Savings rates 20, 40 and 45% in 2026/27. Dividend rates 10.75, 35.75 and 39.35% from 6 April 2026. Savings rates of 22, 42 and 47% from 6 April 2027 (FA 2026 s.5), shown here only as a labelled option. gov.uk, rate changes
Capital gains tax rates
18 and 24% for disposals on or after 30 October 2024. Business Asset Disposal Relief at 18% from 6 April 2026. Annual exempt amount £3,000. gov.uk, CGT rates
Personal portfolio bonds, ITTOIA ss.516, 520 and 522
A policy is a personal portfolio bond if the holder, a connected person or someone acting for them can select the assets outside the permitted categories in s.520. At the end of each insurance year except the last, a deemed gain of 15% of premiums plus earlier deemed gains is taxed, with no top-slicing relief. legislation.gov.uk, s.522
IPTM7725 and IPTM7730
An insurer-appointed manager normally avoids personal portfolio bond status, but a mandate restricted so tightly that the policyholder's instructions in effect determine the assets is treated as selection by the policyholder. gov.uk, IPTM7730
Ask about a particular fund
Send the terms of the fund you are looking at. A specialist replies in writing, usually within one working day.
Ask a question
Editorial standards