Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Hedge fund fight! UK riled up over rich investor taxes

Labour leader Ed Miliband speaks to an audience at Haverstock school in Camden on February 12, 2015 in London.
Getty Images

Hedge funds and the amount of taxes they pay are center stage in U.K. politics right now.

The liberal Labour Party has slammed its conservative Tory rivals for being "bankrolled" by wealthy hedge fund managers, which they say is essentially a tax-avoidance play by ultrawealthy investors.

Labour claims that managers were given a big break by conservatives when they repealed a tax on certain investment funds. They also said hedge funds exploit a "loophole" by using derivatives to avoid paying a "stamp tax" on U.K. stock purchases.

The liberals also note that 27 of the 59 wealthiest hedge fund managers in the country are conservative donors or work for firms that are.

"This is a PM," Labour leader Ed Miliband said recently of conservative Prime Minister David Cameron, "who won't tackle tax avoidance for the simple reason that too many of his friends would get caught in the net. They're the party of Mayfair hedge funds and Monaco tax avoiders."

Connecticut keeps billionaires happy

Mayfair is the posh London neighborhood where some hedge funds are based; the principality of Monaco is known for its low-tax policies.

Read More

Top U.K. fund managers who have donated to Tories include Alan Howard of Brevan Howard Asset Management, Michael Hintze of CQS and Lord Stanley Fink of International Standard Asset Management.

Fink has been a particular target for liberals and this week even threatened to sue for their claims he has sought to avoid paying U.K. taxes through HSBC bank in Switzerland and that he's a "dodgy" political donor.

Other U.K. hedge funds have also fired back. They say they are not avoiding taxes and in fact paid record amounts back to the government.

"Despite some of the recent highly publicized claims, it is clear that the tax contribution of the 500 firms and 40,000 people working in the hedge fund sector in Britain has actually increased to record levels in recent years," Jack Inglis, CEO of top European hedge fund lobbyist Alternative Investment Management Association, said in a statement Wednesday.

AIMA said that the hedge fund sector in the U.K. generated an estimated £4 billion ($6 billion) in tax receipts to the government, up from about £1.7 billion in 2009.

The group noted that £4 billion in tax receipts "could pay for around a dozen new NHS hospitals." That's a response to a Labour charge that the Tories choose hedge fund tax cuts over funding the National Health Service.

AIMA also said that the tax repealed last year doesn't actually benefit the hedge fund industry and that taxing derivatives, a long-used hedge fund investment strategy, would harm the U.K.'s status in financial markets.

"Financial transaction taxes always damage equities markets and this one, were it to be introduced, would undermine the competitiveness of the City of London and increase the cost of capital to ordinary British businesses," Inglis said.

Read MoreWisconsin finds a way around a thorny tax debate