Offshore Funds Manual
Offshore Funds Manual
Introduction to the Offshore Funds Manual
This manual explains how UK resident investors in offshore funds are treated for tax
purposes. It sets out the background to the offshore funds tax regime that applied to UK
investors in offshore funds from 1984 onwards, and provides detailed guidance
explaining how UK investors are treated under the replacement regime introduced by
Finance Act 2008 and the Offshore Funds (Tax) Regulations 2009 (S.I.2009/3001). The
manual also provides guidance relevant to the treatment of investments held by offshore
funds in other offshore funds, for the purposes of the Regulations.
Contents
Introduction
OFM00500
Background to the treatment of UK investors in offshore funds
OFM01000
Overview of the 1984 regime for offshore funds
OFM01500
Overview of the 2009 regime for offshore funds
Definition of an offshore fund
Contents
OFM02000
OFM02200
OFM02500
OFM03000
OFM03500
OFM04000
OFM04500
OFM05000
Overview
Meaning of ‘offshore fund’
Meaning of mutual fund
Exceptions to the meaning of mutual fund
Transparent entities
Umbrella funds and protected cell companies
Classes of interest
Particular arrangements
The 2009 offshore funds regime
OFM06000
Introduction
Investors in non-reporting funds
OFM07000
Introduction
OFM08000
Distributions: the charge to tax
OFM08500
Disposals of interests
OFM09000
The charge to tax on disposals of interests
OFM10000
Exceptions to the charge to tax
OFM10500
Computation of offshore income gains
OFM11000
Deduction of offshore income gains in computing capital gains
OFM11500
Conversion of a non-reporting fund to a reporting fund
Reporting funds
OFM12000
Introduction
OFM12500
Applications for reporting fund status
OFM13000
Duties of reporting funds
OFM13500
Preparation of accounts
OFM14000
Computation of reportable income
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OFM14500
OFM15000
OFM15500
OFM16000
OFM16500
OFM17000
Computation of reportable income: transactions not treated as
trading
Reports to participants
Tax treatment of participants in offshore funds
Provision of information to HMRC
Breaches of reporting fund conditions
Leaving the reporting fund regime
Transitional rules
OFM17500
Transitional rules
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OFM00500
Introduction: background to the treatment of UK investors in
offshore funds
A tax regime for UK investors in offshore funds was first introduced in 1984. Broadly, its
purpose was to counter arrangements that, before its introduction, enabled investors
within the charge to UK tax (‘UK investors’) to accumulate income in an offshore fund
free of tax and, when the investment was realised, to be subject only to tax on capital
gains rather than having to pay tax on income. In contrast, a combination of regulatory
and tax rules meant that UK investors had to pay tax annually on income from UK funds.
The relevant legislation was in Chapter 5 of Part 17 ICTA 1988 (repealed by Schedule 2
of the Offshore Funds (Tax) Regulations 2009 (S.I. 2009/3001)).
The rules relating to the treatment of UK investors in offshore funds were amended on
several occasions in the years since 1984, and replaced by a modern regime introduced
by legislation contained within Finance Act 2008 (by provisions inserted into Finance Act
2009), supplemented by regulations contained within the Offshore Funds (Tax)
Regulations 2009. The legislation covering the 1984 regime in Income and Corporation
Taxes Act (‘ICTA’) 1988 is repealed at the time the new legislation takes effect.
The new regime has effect for the purposes of –

income tax for the tax year 2009-10 and subsequent tax years, and for
distributions made on or after 1st December 2009, and for the purposes of capital
gains tax in relation to disposals made on or after 1 December 2009;

for the purposes of corporation tax on income, for accounting periods ending on
or after 1st December 2009, and for the purposes of corporation tax on
chargeable gains in relation to disposals made on or after 1 December 2009.
This is subject to certain transitional arrangements – see OFM17500 onwards.
The purpose of both the original and the replacement offshore funds tax regimes
remains the same, and they work by charging gains on realisations of interests in
offshore fund investments to tax as income rather than as capital gains, unless certain
conditions are met.
Further details regarding the operation of the previous regime can be found at
OFM01000. The remainder of this manual is concerned with the replacement 2009
regime, and references made to ‘offshore funds’ are made in that context.
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OFM01000
Introduction: overview of the 1984 regime for offshore funds
The previous regime, introduced in 1984, was based on the definition of an ‘offshore
fund’ in Chapter 5 of Part 17 ICTA 1988. Where a UK investor held a ‘material interest’ in
an offshore fund, as defined in that Chapter, then any sums realised on disposals of
such an interest were charged to tax as income, unless certain conditions were met.
Broadly, the conditions were that the fund had distributed at least 85% of the higher of its
income or UK equivalent profits (‘UKEP’) to its investors. The fund had to apply for and
obtain approved status from HMRC, in arrears, for each period of account in order for its
investors to be able to be taxed on realisations under the more favourable capital gains
rules.
Fund managers, or persons acting on their behalf, who require more detailed information
regarding the operation of the 1984 regime should refer to the Offshore Funds Guide
which is available on the HMRC website (at
http://www.hmrc.gov.uk/manuals/osfgmanual/index.htm ), or contact the Collective
Investment Schemes Centre at
HMRC
Collective Investment Schemes Centre (CISC)
1st Floor South
Concept House
5 Young Street
Sheffield
S1 4LB
Liz Foster: Tel 0114 2969 377
Sandra Whyman: Tel 0114 2969 688
Graham Naylor: Tel 0114 2969 769
Investors who require more detailed information regarding how distributions and gains
on realisations are taxed under the 1984 regime should refer to the guidance in the
Savings & Investment Manual (‘SAIM’) available on the HMRC website at
http://www.hmrc.gov.uk/manuals/saimmanual/Index.htm .
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Offshore Funds Manual
Introduction
OFM01500
Overview of the 2009 offshore funds regime
Contents
OFM01550
OFM01600
OFM01700
OFM01800
OFM01900
Introduction
Overview of the regime for funds
Overview of the treatment of investors
Commencement
Overview of transitional arrangements
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OFM01550
Introduction: overview of the 2009 offshore funds regime: general
The previous tax regime for UK investors in offshore funds, introduced in 1984, was
established on the basis that if an offshore fund did not distribute at least 85% of its
income then, on disposal of interests in the fund, UK investors would be charged to tax
on income rather than on capital gains. This was to prevent the possibility of rolling up
income in an offshore fund with any subsequent disposal being subject only to tax on
capital gains, rather than being charged to tax as income. The purpose of the legislation
was to align the tax treatment of interests held by UK investors in offshore funds with
that of interests in investments in UK funds, from which income is chargeable to tax as
income on an arising basis.
The 2009 regime has a similar purpose but moves away from the requirement that
income is distributed in order for UK investors to enjoy the more favourable capital gains
treatment on disposals of interests. Instead, that treatment will apply if an offshore fund’s
income is reported to UK investors in such a way that UK investors are charged to tax on
their share of the ‘reported income’ of the fund, regardless of whether that income is
distributed to them or accumulated in the fund. Funds will either be ‘reporting funds’ or
‘non-reporting funds’.
The previous tax definition of an offshore fund was based upon the regulatory definition
of ‘collective investment schemes’ as set out in the Financial Services and Markets Act
2000 (FSMA), with modifications for tax purposes. The legislation giving the definition
and the detailed rules of the 1984 regime was contained within ICTA 1988.
The definition applying to the 2009 regime is contained within section 40A FA 2008,
inserted by FA 2009. It detaches the tax definition of an offshore fund from the regulatory
definition and instead bases the tax definition on characteristics. The detailed
operational rules relating to the treatment of UK investors are contained within
regulations (the Offshore Funds (Tax) Regulations 2009). The key features of the new
regime for offshore funds rules include:






a new tax definition of an offshore fund (section 40A Finance Act 2008);
a facility for an advance application to be a reporting fund;
a requirement (for reporting funds) to report fund income to UK investors rather
than the requirement to distribute income;
the consideration of only one ‘layer’ of funds for reporting funds; there are no
longer either percentage investment restrictions nor a limit to the number of
‘layers’ of funds into which a reporting fund can invest;
revised rules to deal with breaches of conditions, in particular to deal with
occasions of minor or inadvertent breaches; and
treating investments in non-reporting funds in the same way as under the
1984 regime for investments in non-distributing funds.
So whilst the 2009 regime for offshore funds treats investors within the charge to UK tax
in a similar manner to the 1984 regime it aims to provide greater certainty to funds and
to their investors as well as more flexibility to deal with breaches of the rules. This
manual provides guidance on the definition of an offshore fund (see OFM02000
onwards), and the detailed rules relating to the operation of the regime contained within
the Regulations (see OFM06000 onwards).
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OFM01600
Introduction: overview of the 2009 offshore funds regime: overview
of the regime for funds
Reporting funds
An offshore entity that meets the definition of an offshore fund (under section 40A(2)
Finance Act 2008 – see OFM02000 onwards) can, on meeting certain conditions, apply
to be a ‘reporting fund’. The relevance of reporting fund status for UK investors is that
gains realised on disposals of investments in reporting funds will in most circumstances
be subject to tax on chargeable gains (see the detailed guidance on reporting funds at
OFM12000 onwards for exceptions), whereas gains realised on disposals of investments
in non-reporting funds will be subject to less favourable treatment as they will be
charged to tax on income.
Reporting funds must prepare accounts in accordance with an acceptable accounting
policy, and provide reports of their ‘reportable income’, which is the accounts figure for
the total return of the fund adjusted in accordance with certain rules set out in the
Offshore Funds (Tax) Regulations 2009. They must provide reports to both HMRC, to
include a computation showing their reportable income, and to participants (investors)
that show their proportionate share of that income. In addition, reporting funds must
make certain information available to HMRC when requested to do so.
Funds may apply for reporting fund status in advance or in arrears, subject to certain
time limits – see OFM12700 for details. A fund, once granted reporting fund status, may
rely on that status going forward subject to continued compliance with the reporting
funds rules, which include making reports as described above for each period of
account. A fund may exit the reporting funds regime on giving notice and there are rules
that permit HMRC to exclude a fund from the regime for serious breaches or a number
of minor breaches, subject to an appeals process. Full details can be found at
OFM17000 onwards.
See OFM01700 for an overview of the treatment of UK investors in reporting funds.
There is a list of funds that come within the definition of an offshore fund and have
successfully applied for reporting fund status on HMRC’s website. The list is updated on
a monthly basis and can be found at
http://www.hmrc.gov.uk/collective/reportingfundlist.pdf.
Non-reporting funds
A non-reporting fund is any offshore entity that falls within the definition of an offshore
fund but has not obtained reporting fund status (or has left or been excluded from the
reporting fund regime) – that is to say, an offshore fund to which Part 3 of the Offshore
Fund (Tax) Regulations 2009, which deals with reporting funds, does not apply.
Non-reporting funds are under no obligations to provide information to HMRC but it is
likely that such a fund will be obliged by local law or by its constitution to provide
information to investors in respect of income arising to the fund. Although it is expected
that they would provide details of distributions as a matter of routine to UK investors, it is
the responsibility of investors to otherwise obtain and record such information.
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Offshore Funds Manual
See OFM01700 for an overview of the treatment of UK investors in non-reporting funds.
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Offshore Funds Manual
OFM01700
Introduction: overview of the 2009 offshore funds regime: treatment
of UK investors
Investors in reporting funds
UK investors in a reporting fund will be provided with a report (by one of several
permitted methods) for each period of account showing sums actually distributed per unit
of interest held, as well as any excess forming the balance of its ‘reportable income’ per
unit of interest held in the fund at the end of the reporting period (see the guidance at
OFM15000 onwards for further details).
UK investors must make a return of their income to include both the actual distributions
received, as well as the ‘reported income’ (i.e. their proportionate share of the fund’s
reportable income in excess of the sums distributed). They will be liable to income or
corporation tax as appropriate on the total of those sums.
In most cases, providing the fund in question has been a reporting fund for the entire
period that an investor has held their interest, then, on any subsequent disposal of that
interest, the investor will be subject to tax on any capital gain (or loss) arising. There are
some exceptions – see, for example, OFM01900 for an overview of transitional
arrangements where a reporting fund was a ‘non-qualifying’ fund under the previous
offshore funds regime.
There is a list of funds that come within the definition of an offshore fund and have
successfully applied for reporting fund status on HMRC’s website. The list is updated on
a monthly basis and can be found at
http://www.hmrc.gov.uk/collective/reportingfundlist.pdf.
Investors in non-reporting funds
UK investors in non-reporting funds remain chargeable to income or corporation tax on
any distributions the fund actually makes to them. Alternatively, if the fund is transparent
for income purposes then the investor will be chargeable to tax on income arising on the
underlying investments. There are also rules relating to transparent funds with interests
in reporting funds, to ensure that investors in the top layer fund are chargeable to tax on
their proportionate share of the underlying fund’s reportable income – see OFM08000 for
further details.
On disposal of an interest in a non-reporting fund, UK investors will be subject to tax on
any gains arising as if those gains were income – that is, on the ‘offshore income gain’
(‘OIG’). There are detailed rules relating to the calculation of OIGs and to their effect on
capital gains computations – see OFM10500 and OFM11000 onwards for details.
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Offshore Funds Manual
OFM01800
Introduction: overview of the 2009 offshore funds regime:
commencement
The 2009 regime has effect for the purposes of –

income tax for the tax year 2009-10 and subsequent tax years, and for
distributions made on or after 1st December 2009; and

for the purposes of corporation tax on income, for accounting periods ending on
or after 1st December 2009,
There are some transitional rules for offshore funds relating to periods of account
straddling 1 December 2009 and immediately thereafter – see OFM01900.
UK investors in existing funds will be subject to the legislation contained within Chapter 5
of Part 17 ICTA 1988 (for guidance see the Savings & Investment Manual (‘SAIM’ - on
the HMRC website at http://www.hmrc.gov.uk/manuals/saimmanual/Index.htm ) until the
2009 rules within FA 2008 and the Offshore Funds (Tax) Regulations 2009 take effect
(see OFM00500). Once a fund that existed prior to the operative date of the 2009 regime
becomes a reporting (or non-reporting) fund, then the new rules will apply as explained
in the overview at OFM01700 and in the detailed guidance set out later in this manual.
Again, there are transitional rules that may apply – see OFM01900.
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OFM01900
Introduction: overview of the 2009 offshore funds regime:
transitional arrangements - overview
Offshore funds
Offshore funds may apply for reporting fund status only for periods of account
commencing on or after 1 December 2009.
A fund can apply for distributing fund status under the rules of the previous regime for
offshore funds, for any period of account that straddles the 1 December date (the
‘overlap period’ – paragraph 3 Schedule 1 of the regulations). Note that this is not an
alternative to an application for reporting fund (“RF”) status – a fund will not be able to
apply for RF status for a period of account commencing before 1 December 2009, so if it
does not apply to be a distributing fund then it will simply be a non-distributing fund (or a
‘non-qualifying fund’ in the language of section 760 ICTA). In other words, the
transitional provisions within paragraph 3 of Schedule 1 simply provide a mechanism to
apply for distributing fund status for the overlap period, as it is not possible to apply for
reporting fund status.
If a fund is successful in obtaining distributing status for the overlap period, it can obtain
distributing status for the succeeding period as well, if desired (para (3) of Schedule 1).
However, no application for distributing fund status can be made for periods of account
ending after 31 May 2012 - see OFM17650.
After the overlap period (or the succeeding period where relevant) neither the fund nor
any investor on its behalf can make further requests for distributing fund status – the
fund’s only options from that time will be to be a reporting or a non-reporting fund. See
OFM17600 for full details.
UK investors
UK investors who –


held a ‘material interest’ in a qualifying fund (i.e. one that has held distributing
fund status for all previous periods of account) and
who continue to hold an interest in the fund if it becomes a reporting fund
immediately following its last period as a qualifying fund
will not be subject to a charge to tax on an offshore income gain (‘OIG’) on disposal of
their interest. This is likely to be a common situation, but there are other possibilities and
the transitional rules set out what happens when –


an investor held a ‘material’ interest in a qualifying (i.e. distributing) fund that is
also within the new definition of an offshore fund but that does not become a
reporting fund (para (4) of Schedule 1);
an investor held an interest in a fund that did not come within the previous
definition of an offshore fund but does subsequently come within the new
definition of an offshore fund applying for interests obtained on or after 1
December 2009 (para (7) of Schedule 1).
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Offshore Funds Manual
The rules applying in each of these cases are set out at OFM17500 onwards.
In addition, an investor may have held a ‘non-material’ interest in a non-qualifying (i.e.
non-distributing) fund that is also subsequently within the new definition of an offshore
fund applying for interests acquired on or after 1 December 2009. This is not strictly a
‘transitional’ issue as it may have relevance for many years to come. Accordingly, the
matter is dealt with by regulation 30 of the Offshore Funds (Tax) Regulations 2009:
rights in certain existing holdings (as at 1 December 2009, i.e. ‘grandfathering’
provisions) – see OFM10220 for full details.
There are other matters that may arise on an ongoing basis and that are therefore also
addressed in the main body of the regulations –



Regulation 43: special rules for certain existing holdings (identification rules on
disposal where investor has some rights in an offshore fund that are
grandfathered and some that are not) – see OFM10800;
Regulation 48: conversion of non-reporting fund to reporting fund (deemed
disposal election by investors) – see OFM11500;
Regulation 100: deemed disposals of interests (election by investors where a
reporting fund becomes a non-reporting fund) – see OFM15800.
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Definition of an offshore fund
Contents
OFM02000
OFM02200
OFM02500
OFM03000
OFM03500
OFM04000
OFM04500
OFM05000
Overview
Meaning of ‘offshore fund’
Meaning of mutual fund
Exceptions to the meaning of mutual fund
Transparent entities
Umbrella funds and protected cell companies
Classes of interest
Particular arrangements
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Offshore Funds Manual
Definition of an offshore fund
OFM02000 – Overview
Contents
OFM02050
OFM02100
OFM02110
OFM02150
Introduction
Arrangements within the definition of an offshore fund
Arrangements not within the definition of an offshore fund
Transitional arrangements
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Offshore Funds Manual
OFM02050
Introduction
Characteristics based definition
The definition of an offshore fund is based on characteristics. The relevant legislation is
at FA2008/Ss40A – 40G. Section 40A makes it clear that an ‘offshore fund’, whatever its
legal form, must be a ‘mutual fund’. That term is defined at section 40B. Sections 40C
and 40D state that in the case of umbrella arrangements and arrangements with more
than one class of interest respectively it is the sub-fund or class of interest that is to be
considered rather than the main arrangements, so that for example umbrella
arrangements could consist of sub-funds some of which come within the definition of an
offshore fund and some that do not (this might typically be the case where one or more
of the exclusions from the definition apply to a particular sub-fund(s) – see below).
Meaning of mutual fund
In considering whether any particular arrangements are a mutual fund it is necessary to
consider all agreements and understandings which might form part of the basis for any
contract or entity, that is, “arrangements” has a wide meaning and is not limited to, for
example, the legal documents establishing a fund. In another sense however
arrangements has a narrow meaning in that it is used here to describe the documents
undertakings and agreements constituting a particular entity and not the wider economic
arrangements that may be constituted by a group of entities. It follows, therefore, that in
a ‘fund of funds’ situation, including those headed by fully transparent entities such as
limited partnerships, it is necessary to consider each set of arrangements independently
of the others in the structure – so, for example, a limited partnership cannot be viewed
as being part of any other ‘arrangements’ and thus forming part of an ‘offshore fund’.
However, if the terms on which investment in the underlying entities are communicated
to investors or potential investors in documentation or marketing material relating to a
top level entity (for example, a partnership agreement that makes it clear that underlying
companies will be wound up by a certain date) then, in a case where the top level entity
is in a position to control any underlying entity, those terms are relevant to determining
whether the underlying entity itself is an offshore fund.
The characteristics based approach also means that all UK investors in the same
offshore fund face the same set of tax rules (subject to certain preserved treatment for
investments held before 1 December 2009 (see OFM17500 onwards)). This is subject to
the situation where rights of investors change during the holding of their investment (see
OFM09100).
Exceptions to the meaning of ‘mutual fund’
The intention of the offshore fund rules generally is to prevent the roll-up of income in
pooled investment arrangements, with a subsequent realisation at (or nearly at) net
asset value, (or by reference to an indexed value) in capital form. Section 40E therefore
provides exceptions to the meaning of ‘mutual fund’ for certain closed-ended funds
where income roll-up would not be possible, as well as for those closed ended funds
with unlimited life so that the investor does not have an expectation of redemption at net
asset value (or sale at net asset value).
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Offshore Funds Manual
If the arrangements are not a mutual fund then they cannot be an offshore fund, and so
the operational rules will not apply (the operational rules relating to the treatment of UK
resident investors in offshore funds are contained within the Offshore Funds (Tax)
Regulations 2009 (S.I.2009/3001) - those rules apply when a UK resident holds an
interest in an ‘offshore fund’ as defined at Sections 40A to 40G Finance Act 2008 (‘FA
2008’), inserted by FA 2009).
The exceptions in Section 40E only apply to ‘closed-ended’ arrangements; that is
arrangements where an investor does not have a right to redeem their interest on a
basis calculated entirely or nearly entirely by reference to the net asset value of their
proportionate share of the scheme property. In particular, the exceptions apply in
circumstances where it is only possible for an investor to realise their investment on that
basis in the event of a winding up and the arrangements do not have a limited life, or
where the arrangements do have a limited life but other conditions apply so that income
cannot be rolled up (see OFM03000 onwards for details).
Requests for advice
HMRC is not able to provide an up-front clearance service confirming whether or not a
particular set of arrangements comes within the definition of an offshore fund in every
case. It will often be clear that a particular set of arrangements either does or does not
come within the definition, but HMRC recognise that will not always be the case. If, after
having considered the guidance in this manual in relation to all of the facts, there is
material uncertainty as to whether particular arrangements are within the definition then
HMRC will provide an opinion unless it is considered that the request does not come
within published guidelines. Although this is not a formal clearance service, enquirers
should consider the guidance concerning clearance requests available on the HMRC
website at http://www.hmrc.gov.uk/cap/links-dec07.htm#annexb , including the
circumstances in which HMRC will and will not provide an opinion. Queries should be
sent at least 28 days in advance if the matter is material to whether or not to proceed
with marketing to UK investors, and should be addressed to –
HMRC
Collective Investment Schemes Centre (CISC)
1st Floor South
Concept House
5 Young Street
Sheffield
S1 4LB
(Please see OFM01000 for a list of contacts at CISC if you need to speak to someone
prior to writing to HMRC.)
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OFM02100
Arrangements within the definition of an offshore fund
As the operational rules are intended to apply to interests held in certain types of
arrangements that have particular characteristics, and those arrangements may be
based anywhere in the world, it is not possible to provide a list of all entity types that
come within the definition of an offshore fund. The paragraphs below provide a broad
overview of the types of arrangements that HMRC consider would come within the
definition and should not be considered to be exhaustive: Open-ended investment companies (‘OEICs’)
Arrangements that take corporate form and that permit investors to redeem their
interests on request or at intervals, entirely or nearly entirely by reference to the net
asset value (‘NAV’) of their proportionate share of the scheme property or an index. An
example of such a fund would be Belgian SICAVs.
Open-ended contractual arrangements
Arrangements that take contractual form and that permit investors to redeem their
interests on request or at intervals, entirely or nearly entirely by reference to the net
asset value (‘NAV’) of their proportionate share of the scheme property or an index. An
example of such a fund would be a Luxembourg Fonds Commun de Placement (‘FCPs’)
but note that limited partnerships are specifically excluded from this category by
FA2008/S40A(3). These sorts of arrangements are usually transparent for income
purposes – there is further guidance on income transparent arrangements, including
details of when an offshore income gain will not arise for UK investors, at OFM03500
onwards.
Foreign unit trusts
Arrangements that take trust form where the trustees of the property are not resident in
the UK and that permit investors to redeem their interests on request or at intervals,
entirely or nearly entirely by reference to the net asset value (‘NAV’) of their
proportionate share of the scheme property or an index. An example of such a fund
would be a Jersey property unit trust (‘JPUT’). Some foreign unit trusts are transparent
for income purposes – there is further guidance on income transparent arrangements,
including details of when an offshore income gain will not arise for UK investors, at
OFM03500 onwards.
Arrangements with limited life
Arrangements that take corporate form (irrespective of whether they have fixed share
capital) or contractual form that come within the definition of a mutual fund at
FA2008/S40B and that have a fixed or determinable life at the end of which investors
would be able to redeem their interest in the arrangements entirely or nearly entirely by
reference to the NAV of their proportionate share of the scheme property or an index,
unless any of the exceptions at FA2008/S40E apply. An example of such a fund would
be a Cayman registered company with a limited life that, although it did not permit
redemptions on request, could be reasonably expected to provide redemption by
reference to NAV (etc.) at the end of its life.
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Further guidance
Further guidance on particular entity types (such as limited life companies) is provided in
this manual at see OFM05000 onwards. The legislation at FA2008/Ss40A - 40G must
still be considered where there is any doubt as to whether a particular set of
arrangements come within the definition.
See OFM02110 for the types of arrangements that, in general, HMRC consider would
not come within the definition.
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Offshore Funds Manual
OFM02110
Arrangements not within the definition of an offshore fund
As the operational rules are intended to apply to interests held in certain types of
arrangements that have particular characteristics, and those arrangements may be
based anywhere in the world, it is not possible to provide a list of all entity types that do
not come within the definition of an offshore fund. The paragraphs below provide a broad
overview of the types of arrangements that do not come within the definition: Partnerships
Partnerships are specifically excluded from the meaning of an offshore fund at
FA2008/S40A(2)(c) by FA2008/S40A(3).
Limited liability partnerships
Limited liability partnerships (‘LLPs’) incorporated under the Limited Liability
Partnerships Act 2000 but that are tax resident outside the UK are excluded from the
definition even if they are treated as not being a “body corporate” (FA2008/S40A(6)).
This exclusion does not apply to LLPs formed under the law of any other territory – if
such an LLP is a body corporate (and opaque for capital gains purposes) and a mutual
fund then it will come within the definition of an offshore fund at FA2008/S40A(2)(a).
Arrangements that are not ‘mutual funds’
Any corporate or contractual entity not coming within the definition of a mutual fund at
FA2008/S40B will not be an offshore fund. This would include, for example, foreign
equivalents of UK investment trusts or UK Real Estate Investment Trusts (‘UK-REITs’)
as those types of arrangements do not offer investors a facility to redeem their interests
on request or at intervals, entirely or nearly entirely by reference to the net asset value
(‘NAV’) of their proportionate share of the scheme property or an index, and nor are they
limited life.
Closed-ended arrangements within the exceptions at FA2008/S40E
Arrangements with fixed share capital or similar, that otherwise would come within the
definition of a mutual fund, may still be excluded from the definition of a mutual fund (and
therefore an offshore fund) if they come within any of the exceptions at FA2008/S40E.
Examples would include arrangements taking corporate form without being limited life or
that have limited life but either do not generate income or all income is paid or credited
to investors so that it would be chargeable to tax as income. See OFM03000 onwards
for further guidance.
Further guidance
Further guidance on particular entity types (such as limited life companies) is provided in
this manual at OFM05000 onwards. The legislation at FA2008/ss40A-40G must still be
considered where there is any doubt as to whether a particular set of arrangements
comes within the definition.
See OFM02100 for the types of arrangements that, in general, HMRC consider would
come within the definition.
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OFM02150
Transitional arrangements – Regulation 30
Holdings acquired before 1 December 2009 in arrangements that
• fall within the new definition of an offshore fund but which,
• on the date that the investor acquired them, were not an offshore fund within
the previous meaning at Chapter 5 of Part 17 Income and Corporation Taxes
Act (‘ICTA’) 1988, or
 were within the definition but did not constitute a ‘material interest’ (s759 ICTA
1988 before 1/12/2009)
are subject to preserved treatment, that is they are not treated as relevant holdings in an
offshore fund.
The same treatment may apply to holdings acquired after 1 December 2009 but only
where they were acquired under a written, legally binding agreement entered into by the
investor prior to 30 April 2009 and the terms of the agreement are not varied on or after
that date. If such an agreement was conditional, then all of the conditions must have
been satisfied before 30 April 2009 in order for this provision to apply.
See OFM17500 onwards for full details of the transitional provisions contained within the
offshore funds regulations.
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Definition of an offshore fund
OFM02200 – Meaning of ‘offshore fund’
Contents
OFM02250
OFM02300
OFM02350
OFM02400
Introduction
Corporate entities
Property held on trust
Other arrangements that create rights in the nature of co-ownership
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OFM02250
2008
Meaning of offshore fund: introduction – Section 40A Finance Act
The definition of an offshore fund is limited to ‘mutual funds’ which take one of three
forms and which are resident in, or based in, a territory outside the United Kingdom.
The meaning of the term ‘mutual fund’ is given by section 40B FA 2008, and is explained
in more detail at OFM02500 onwards. Those pages discuss each type of mutual fund in
more detail, but broadly the definition is applied to a company, trust or any other vehicle
or arrangement that meets the following characteristics –
• it is not UK tax resident;
• it exists to enable participants to take part in the benefits arising from
acquisition, holding, managing, or disposing of assets of any description;
• the participants do not have day-to-day control of the management of the
property whether or not they have the right to be consulted or give directions;
and
• a reasonable investor would expect to be able to realise any investment based
entirely or almost entirely by reference to the net asset value of the assets
under management or, alternatively, by reference to an index of any
description.
The three forms of mutual funds that fall within the definition of an offshore fund are –
• a mutual fund constituted by a body corporate resident outside the United
Kingdom (section 40A(2)(a) - see OFM02300)
• a mutual fund under which property is held on trust for the participants by
trustees resident outside the United Kingdom (section 40A(2)(b) - see
OFM02350); and
• a mutual fund constituted by other arrangements that create rights in the nature
of co-ownership where the arrangements take effect by virtue of the law of a
territory outside the United Kingdom (section 40A(2)(c) - see OFM02400).
Foreign partnerships within the scope of section 40A(2)(c) are specifically excluded from
the meaning of an offshore fund given by section 40A(3) FA 2008.
See OFM02100 for examples of the types of arrangements that are within the definition
of an offshore fund, and OFM02110 for examples of the types of arrangements that are
not within the definition of an offshore fund.
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OFM02300
Meaning of offshore fund: corporate entities – Section 40A(2)(a)
Finance Act 2008
All mutual funds constituted as incorporated bodies resident outside the United Kingdom
fall within the definition of an ‘offshore fund’, except for a non-resident limited liability
partnership (LLP) incorporated under UK law (The Limited Liability Partnerships Act
2000), which is excluded by section 40A(6) FA 2008. This exclusion does not apply to
LLPs formed under the law of any other territory – if such an LLP is a body corporate
(and opaque for capital gains purposes) and a mutual fund then it will come within the
definition of an offshore fund at FA2008/S40A(2)(a).
Open-ended investment companies and other companies with similar characteristics
would fall within section 40A(2)(a).
It is expected that relatively few fixed share capital companies will fall within the new
definition. So, for example, an investment in a trading or investment company or group
with fixed share capital and that was not limited life (even if local law provides for
continuation votes) would not come within the definition. But under the characteristics
based approach, entities that have fixed share capital and that are structured in such a
way that they share characteristics of open-ended share capital arrangements will be
within the definition. So, fixed share capital companies that are predicated on the basis
that investors will get a net asset value return or a return which is very close to net asset
value may fall within the new definition. That will also be the case where there are no
redemption rights but the arrangements have a limited life and a reasonable investor
could expect to get a net asset value return on winding up (unless one of the exceptions
in FA2008/S40E applies).
See OFM05200 onwards for further guidance on fixed share capital companies, and
OFM02500 onwards for guidance regarding the meaning of the term ‘mutual fund’.
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Offshore Funds Manual
OFM02350
Meaning of offshore fund: property held on trust – Section 40A(2)(b)
Finance Act 2008
Most mutual funds where the property of the fund is held on trust for the investors by
trustees who are resident outside of the United Kingdom will fall within the definition of
‘offshore fund’.
It will usually be the case that offshore trust arrangements will not come within the
definition of a mutual fund, but those that do come within the meaning of a mutual fund
at FA2008/S40B will be offshore funds, unless exceptionally the trust is ‘closed-ended’ –
that is, it cannot issue or redeem units on request – and it falls within any of the
exceptions within FA2008/S40E.
See OFM02500 onwards for guidance regarding the meaning of the term ‘mutual fund’.
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OFM02400
Meaning of offshore fund: other arrangements that create rights in
the nature of co-ownership – Section 40A(2)(c) Finance Act 2008
All mutual funds constituted by ‘other arrangements’ (i.e. those not constituted by bodies
corporate or where property is held on trust) creating rights in the nature of coownership, which take effect by virtue of the law of a territory outside the UK, are
brought within the definition of an offshore fund.
This is subject to the important exception that mutual funds constituted by two or more
persons carrying on a trade or business in partnership and that would otherwise come
within the meaning of an offshore fund under FA2008/S40A(2)(c) are specifically
excluded from doing so by FA2008/S40A(3).
Co-ownership is not restricted to the meaning of that term in the law of any part of the
United Kingdom, so would take its meaning from the law of the territory in which the
arrangements take effect.
Types of mutual funds that come within the definition of an offshore fund at
FA2008/S40A(2)(c) would include, for example, contractual arrangements such as
Luxembourg Fonds Commun de Placement (‘FCPs’), but see OFM03500 onwards for
further information concerning these and other types of contractual arrangements that
are transparent for income purposes.
See OFM02500 for guidance regarding the meaning of the term ‘mutual fund’.
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Offshore Funds Manual
Definition of an offshore fund
OFM02500 – Meaning of mutual fund
Contents
OFM02600
OFM02700
Introduction
Conditions
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Offshore Funds Manual
OFM02600
Meaning of mutual fund: introduction – Section 40B Finance Act 2008
The meaning of the term ‘mutual fund’ is drawn widely and encompasses any
arrangements with respect to property of any description, including money - in other
words, it does not matter what the underlying investments are.
Whether arrangements amount to a mutual fund depends on three conditions
(Conditions A to C), all of which must apply to the ‘participants’ of the arrangements
being considered. The conditions bring within the meaning of ‘mutual fund’ those
arrangements that, broadly, have the characteristics of pooled investments.
‘Participants’ are those persons who take part in the arrangements – that is, the
investors - and it makes no difference whether they directly own the underlying property
of the arrangements or not. So, for example, there is no difference between a participant
who has a share in a mutual fund constituted by a company (in which case under most
forms of company law the participant would not have an ownership interest in the
underlying property) and on the other hand, an interest in a trust or other contractual
arrangement which may well give the participant a direct ownership right
(FA2008/S40A(5)).
If arrangements relate to a number of separate pools of assets then each asset pool is
considered separately. Similarly if an asset pool has different classes of interest then
each class of interest is considered separately. For more details see FA2008/Ss 40C
and 40D, which relate to umbrella arrangements and arrangements comprising more
than one class of interest (see OFM04000 and OFM04500).
There are exceptions to the definition of a mutual fund given by FA2008/S40E (see
OFM03000 onwards).
Conditions A to C are considered in more detail in the following pages.
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Offshore Funds Manual
Definition of an offshore fund
Meaning of mutual fund
OFM02700
Contents
OFM 02705
OFM 02710
OFM 02715
OFM 02720
OFM 02725
OFM 02730
Conditions
Condition ‘A’
Condition ‘B’
Condition ‘C’
Condition ‘C’: Meaning of 'reasonable investor'
Condition ‘C’: Realisation of investment by reference to NAV or an
index
Condition ‘C’: Realisation of investment by reference to NAV or an
index: Disposals of underlying fund assets
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OFM02705
Meaning of mutual fund: conditions: condition ’A’ – Section 40B(2)
Finance Act 2008
Condition A requires it to be the purpose or effect of the arrangements to enable the
participants to ‘participate in the acquisition, holding, management or disposal of the
property, or to receive profits or income from those transactions or sums paid out of
such profits or income’.
The condition is deliberately drawn widely so that it applies to a broad range of
arrangements that are designed to facilitate pooled investment. ‘Property’ in this context
therefore applies to all asset classes, including securities, equities, and real property and
also includes contracts and derivatives.
Some arrangements that come within the meaning of an offshore fund will nevertheless not give
rise to an offshore income gain when an investor disposes of an interest in the arrangements if tax
is chargeable under other provisions of the Taxes Acts. This would include, for example, sums
charged to tax under the loan relationships rules. Chapter 3 of The Offshore Funds (Tax)
Regulations 2009 (S.I. 2009/3001) contains regulations setting out exceptions from the charge to
an offshore income gain (see OFM10000 onwards).
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Offshore Funds Manual
OFM02710
Meaning of mutual fund: conditions: condition ’B’ – Section 40B(3)
Finance Act 2008
Condition B is that the participants do not have day-to-day control of the management of
the property. In this context, ‘participants’ means persons acting in the capacity of
investors in a particular scheme and control would therefore mean having control by way
of rights as an investor. So, if the scheme manager held units or shares in the fund
managed then that would not prevent condition B from being satisfied.
In the case of a fund with an advisory committee, which would typically comprise either a
few key investors or independent investment experts, again nothing prevents Condition
B from being satisfied (particularly so in this case as it would not be expected that the
role of the investment manager would be usurped by such a committee).
Merely having a right to be consulted or to give directions does not result in a participant
having day-to-day control. So, for example, the right to a vote at annual general
meetings would not be considered to amount to day-to-day control.
In order for the arrangements to satisfy condition B, not all of the individual participants
must have day-to-day control, regardless of the extent of their interest in the fund. So,
even if only one participant does not have day-to-day control the arrangements would
satisfy condition B.
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OFM02715
Meaning of mutual fund: conditions: condition ’C’ – Section 40B(5)
Finance Act 2008
Condition C requires that a ‘reasonable investor’ would, as participant in the
arrangements, expect to be able to realise all or part of an investment in the
arrangements on a basis calculated entirely or almost entirely by reference to either
• the net asset value (NAV) of the scheme property, or
• an index of any description.
To ‘expect’, in this context, does not necessarily mean that an enforceable right exists,
but it does mean that an investor could reasonably expect to rely on realisation as
described.
Realisation of an investment has a wide meaning, and so may be by redemption, sale to
a third party, or by distribution of assets on the termination of a fund for example. So, if a
fund has a limited life, it would not matter that an investor may not be able to sell his or
her shares or units on the open market for a sum representing NAV or close to NAV as
there would be an expectation that the investment could be realised at or close to NAV
when the fund terminated.
See OFM02720 for guidance on the meaning of a ‘reasonable investor’, and OFM02725
regarding realising an investment on a basis calculated entirely, or almost entirely, by
reference to NAV or an index of any description.
The exceptions to the meaning of the term ‘mutual fund’ relate directly to Condition C,
and so Condition C must be read in conjunction with section 40E FA 2008 (which
provides the exceptions) for the purposes of determining whether or not arrangements
come within the meaning of a mutual fund, and hence an offshore fund– see OFM03100
onwards.
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OFM02720
Meaning of mutual fund: conditions: condition 'C': meaning of
'reasonable investor' – Section 40B(6) Finance Act 2008
A ‘reasonable investor’ is not defined in the legislation. It is assumed that such an
investor (whether an individual, corporate investor, or otherwise) would have read the
documentation and taken account of all additional material and communications of any
nature whatsoever provided by the fund prior to investing.
Where the scheme documentation is not written in a language that the investor can
understand then it is assumed that the investor will have obtained a translation of the
prospectus and any other relevant scheme documents or material.
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OFM02725
Meaning of mutual fund: conditions: condition 'C': realisation of
investment by reference to NAV or an index – Section 40B(5) Finance Act 2008
There is no definition within the legislation of ‘almost entirely’ as any sort of percentage
limit of variation from NAV could be susceptible to arrangements seeking to avoid the
intention of the offshore funds rules. It depends on what the arrangements are intended
to provide. For example, buy-back arrangements normally take effect when there is a
large discount to NAV, but may also be used in very exceptional circumstances to buy
back at a very small discount or at NAV which, on its own, may not mean that the
arrangements constitute a mutual fund. OFM05250 provides further guidance on share
buy-backs and share issuance.
Open-ended and closed-ended arrangements
Condition C, when read in conjunction with section 40E(1), provides a clear distinction
between a mutual fund and a company organised in the way that, for example, an
investment trust company in the UK is organised. Such a company is a closed-ended
company, in the sense that it does not allow investors to redeem their shares on request,
nor does it issue new shares on request (but see OFM05300 onwards where such
closed-ended companies have a limited life). This contrasts with an open-ended
investment company which is designed to enable investors to realise NAV and does so
through its ability to issue or redeem shares.
A reasonable investor in what may generally be regarded as a closed-ended company
that meets Conditions A or B would normally only expect to be able to realise NAV on
the liquidation of the company. So section 40E(1)(a) excludes from section 40B
(‘meaning of ‘mutual fund’ etc’) any case where a reasonable investor would only be
able to realise the investment in the arrangements in the event of a winding-up,
dissolution or termination of the arrangements, and where certain other conditions
(condition ‘X’ or ‘Y’) apply (section 40E(1)(b) - see OFM03100 onwards).
Realisation of investment on a basis calculated at or close to NAV
It is not necessary that the investor obtains NAV directly from the fund. Where a
reasonable investor could expect to receive NAV on selling their interest on a secondary
market the fund will be an offshore fund if all other conditions are satisfied. For example,
Exchange Traded Funds (ETFs) are usually operated in such a way that the quoted
prices are at NAV or very close to NAV because market makers are able to create or
redeem units (and in that sense such funds are open-ended), and so ETFs would be
expected to qualify as mutual funds. On the other hand, arrangements where a fund
offered to buy back shares to keep a discount on the share price within a reasonable
limit would not make the fund a mutual fund unless it was clear to a reasonable investor
at the time that they invested (or on alteration of the terms of an investment) that there
were such arrangements and that they were intended to ensure that such purchases
were at NAV or almost or very close to NAV.
Shares trading close to NAV
The mere fact that shares in a closed-ended arrangement sometimes trade at or close to
NAV does not mean that Condition C is satisfied unless that is as a result of
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arrangements being in place such that a reasonable investor could expect to receive
NAV or close to NAV on selling their interest.
Warrants and options
Warrants or options that give an investor the right to sell shares back to an issuer for a
particular price will not cause Condition C to be satisfied unless the price is determined
by reference to NAV so that the investment can be realised at or close to NAV. Similarly,
rights that carry the option to convert to other classes of interest would only satisfy
Condition C if the new rights themselves permitted an investor to realise their investment
at or close to NAV.
Realisation of investment by reference to an index
In some cases an investor may have a right to redeem an investment at an amount not
representing the assets directly invested in, but which is expressed in terms of an index.
The fund manager may then invest the assets so as to produce a return as nearly as
possible matching the index which is offered. In such a case Condition C will also be
met. Again, this is subject to exceptions where conditions ‘X’ or ‘Y’ apply.
In many cases investments designed to produce an indexed return are likely to be nonincome producing (that is, they reflect capital growth only) in which case the exception
provided by FA2008/S40E(4) – condition Y1 – will apply (see OFM03100 onwards).
Where an investment is by reference to an index that reflects both capital growth and
income returns then condition Y1 would not apply, but condition Y3 might – see
OFM03130.
Where an investment is designed to produce a return for investors that equates in
substance to a return on capital invested at interest none of the possible exceptions will
apply (FA2008/S40E(7) – see OFM03115).
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OFM02730
Meaning of mutual fund: conditions: condition 'C': realisation of
investment by reference to NAV or an index: disposals of underlying fund assets –
Section 40B(5) Finance Act 2008
Disposals of underlying fund assets
Alternatively, a reasonable investor could expect to realise their investment at or close to
NAV as a result of the intention of a fund to dispose of its assets in tranches followed by
a final distribution of any remaining assets, as opposed to a liquidation of all of the fund’s
assets on a winding-up. For example, a fund may be set up in order to acquire
distressed debt assets with an intention to realise those assets as they mature and to
distribute the proceeds to investors in the following way –
Step 1: debt assets are acquired with 1, 2 and 3 year lives;
Step 2: the assets are realised, without reinvesting the proceeds, at the various
maturity dates;
Step 3: the sums realised on the occasion of each disposal are distributed to
investors and, finally;
Step 4: the fund is formally wound up and any remaining assets distributed.
There would be an expectation of realising an investment in such an arrangement at or
close to NAV (‘at NAV’ on the final distribution, or perhaps ‘close to NAV’ if remaining
negligible assets are not in fact distributed). In those circumstances condition C would
be satisfied and the fund would be a mutual fund, so long as conditions A and B were
also satisfied and none of the exceptions at FA2008/S40E applied, and would also
therefore be an offshore fund as defined at FA2008/S40A.
Where this or a similar fact pattern is present, it is still possible in those circumstances
for a fund that otherwise comes within the meaning of a mutual fund at FA2008/S40B to
satisfy condition X (not limited life - but that would not be the case for the example
above, as the nature of the fund’s assets and intention not to reinvest mean that there is
a determinable latest termination date – see OFM03110) or condition Y (either no
income arising in the fund, no entitlement to income arising in the fund or income of the
fund is distributed – see OFM03115 onwards). This is because it is the final distribution
on termination of the fund that gives rise to the expectation of realising an investment at
or close to NAV.
Note that in the example above, a UK investor would be treated as making a partdisposal of his or her interest (see TCGA92/S42), and if the fund was within the
definition of an offshore fund then the treatment of that part-disposal would depend on
whether regulation 17 of The Offshore Funds (Tax) Regulations 2009 applied. If
regulation 17 did apply then an offshore income gain would arise on any gain, or if it did
not apply then any gain would be subject to capital gains tax or corporation tax.
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Definition of an offshore fund
Exceptions to meaning of mutual fund
OFM03100
Contents
OFM 03105
OFM 03110
OFM 03115
OFM 03120
OFM 03125
OFM03130
Conditions
Introduction
Condition X
Condition Y: General
Condition Y1: Not “relevant income-producing assets”
Condition Y2: no entitlement to income or any benefit arising from
income
Condition Y3
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OFM03105
Exceptions to meaning of mutual fund: introduction – Section 40E(3)
Finance Act 2008
In order to meet the definition of an offshore fund, arrangements must be a mutual fund.
Section 40B provides three conditions, A to C, which must be met for arrangements to
be a mutual fund - see OFM02700.
Even if all three conditions are met, section 40E provides exceptions to certain types of
arrangements that would otherwise be mutual funds. The exceptions are dependent on
whether the arrangements are such that –


the only occasion on which a reasonable investor would expect to be able to
realise an investment based entirely or almost entirely by reference to the net
asset value (‘NAV’) of the property or an index of any description is on a windingup, dissolution or termination of the arrangements, such as in a case where there
is a final redemption of a class of interest, (FA 2008/S40E(1)(a)), and
one of two conditions, ‘X’ or ‘Y’, are met (FA 2008/40E(1)(b)).
Section 40E(1)(a) has the effect that ‘open-ended’ arrangements (i.e. those that enable
investors to realise NAV by disposing of their interest to the fund manager) cannot come
within the exceptions provided by section 40E.
The conditions ‘X’ or ’Y’ do, however, except certain types of closed-ended
arrangements from the meaning of a ‘mutual fund’.
The exceptions can also apply to arrangements where a reasonable investor could
expect to realise their investment at or close to NAV as a result of the intention of a fund
to dispose of its assets in tranches followed by a final distribution of any remaining
assets, as opposed to a liquidation of all of the fund’s assets on a winding-up (see
OFM02730).
Further guidance on conditions X and Y can be found at OFM03110 and OFM03115 to
03130 respectively. See OFM05340 for guidance on limited life companies that are
subject to a continuation vote.
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Offshore Funds Manual
OFM03110
Exceptions to meaning of mutual fund: condition X – Section 40E(2)
Finance Act 2008
The most important exception, provided by condition X (section 40E(2), is that a
reasonable investor cannot expect the arrangements to terminate on or by a date fixed
in advance.
This condition means, for example, that ordinary shares in any company with defined
share capital (that is, not an open-ended company with variable share capital) and which
does not have a limited life, will not be an offshore fund.
Condition X requires that the arrangements are not such that they are designed to
terminate on a date that is stated or determinable under the arrangements. As
elsewhere “arrangements” has a wide meaning and is not limited to the documents
establishing the fund, so can include all agreements and understandings. Similarly,
“determinable” has a wide meaning. So for example, if a fund prospectus stated that the
fund was intended to wind-up after it had realised all of its assets, but those assets
consisted of debt instruments none of which was longer dated than 5 years then the
termination date would be determinable (unless, of course, it was clear that the fund
would reinvest the proceeds of asset realisations and was not ‘limited life’ in any other
regard).
Asset realisations
It will not be sufficient to satisfy condition X for a fund to state that an intention to dispose
of its assets on or by a certain date is subject to market conditions or some similar
caveat where it is clear that a long-stop date exists, or there is no specific and realistic
possibility that would lead a reasonable investor to conclude that the fund would not
necessarily be able to dispose of its assets by the date stated. For example, if a fund’s
assets consist of short-dated debt instruments, or commercial leases with a life of 20
years then, unless the fund was reasonably likely to re-invest funds from disposals,
condition X could not be satisfied. Where there is no such long-stop date implicit from
the nature of the assets themselves then condition X may still not be satisfied if a fund
stated an intention to dispose of its assets in, say, four years’ time ‘subject to market
conditions’ or some other broad statement.
HMRC will consider particular cases where a fund manager or its advisers believe that
there are tangible and specific reasons why such a statement should lead to condition X
being satisfied but this is expected to apply in exceptional circumstances only. An
example of the circumstances when a broad statement relating to whether assets could
be realised on or by a given date may be sufficient to satisfy condition X would be if a
fund held significant assets in a country about which there were real and significant
concerns regarding any future government’s policy in respect of the assets in question
(such as public declarations of an intention to nationalise particular industries or
companies in which the fund holds significant investments).
Continuation votes
Where arrangements provide for a continuation vote or similar action to determine
whether they will persist beyond a given date that will not, in itself, mean that condition X
is not met. So, if a reasonable investor, considering all of the facts, could not have any
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Offshore Funds Manual
expectation that a continuation vote would fail then, provided the continuation vote was
not for a determinable period and absent any other factors, the arrangements could not
be said to have a determinable life and condition X could then be satisfied. HMRC
accept that it could usually be expected that condition X would be satisfied where
continuation votes are provided for because continuation resolutions may well be passed
if a fund is performing well, and a reasonable investor would be expected to invest on
the basis that a fund would be successful. However, if arrangements or understandings
are in place so that it could be expected that a continuation vote would not be passed
then there would be a determinable date.
Even if a date of termination is stated or determinable, so that condition X could not be
satisfied, it is still necessary to consider Conditions Y1 to Y3 to determine if the
arrangements amount to a ‘mutual fund’ – see OFM03115 to OFM03130.
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OFM03115
Exceptions to meaning of mutual fund: condition Y: general –
Section 40E(3) Finance Act 2008
As explained in OFM03110 even where Condition X is not met the arrangements being
considered may still be excepted from the meaning of ‘mutual fund’ where the basic
condition at section 40E(1)(a) and condition Y is met. This is because the purpose of the
offshore fund rules is to ensure that income cannot be converted into capital by using
offshore arrangements. To avoid unnecessary administrative burdens for arrangements
that neither give rise to income at the fund level nor would give the investor an income
flow if they invested in the underlying assets directly, closed–ended capital only
arrangements are excluded from the definition of a mutual fund in certain circumstances
by the exceptions provided by FA2008/S40E.
Condition Y is expressed in terms of three alternative sub-conditions, Y1 to Y3. These
sub-conditions are explained at OFM03120 to OFM03130.
None of the sub-conditions Y1 to Y3 can be met where the arrangements are designed
to produce a return for investors that equates, in substance, to the return on an
investment of money at interest (section 40E(7)). The question of whether or not
arrangements are designed to produce such a return is determined by reference to the
facts, and is not limited to arrangements that provide similar returns to those provided by
placing money on deposit (so, for example, it does not matter if the expected return
would be greater than would be expected from money placed on deposit). If
arrangements provide for a return by reference to a fixed return on capital invested, for
example £100 invested provides for a return of £150 in 3 years’ time, then Condition Y
could not be satisfied. Such arrangements would include, for example, zero dividend
preference shares (‘ZDPs’).
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OFM03120
Exceptions to meaning of mutual fund: condition Y1: not “relevant
income-producing assets”– Section 40E(4) Finance Act 2008
Even if a date of termination is stated or determinable under the arrangements, the
arrangements are not a mutual fund if none of the assets of the arrangement are
“relevant income-producing assets” (see below). The exception provided by condition Y1
is designed to exclude arrangements which invest in assets intended to give a purely
capital growth based return.
The term ”relevant income producing assets” is defined at FA2008/S40F and means
assets which produce income on which, if they were held directly by an individual
resident in the United Kingdom, the individual would be charged to income tax (section
40F(1)). That would include, for example, sums that would be treated as offshore income
gains generated by the sale of investments in underlying non-reporting funds. This is
subject to limited exceptions, as follows –
• There may be cases where underlying assets are acquired (and on which
income would arise) but which are hedged using derivatives (such as a total
return swap). Section 40F(2) ensures that such assets that are hedged are not
regarded as income producing assets if no income arises or is expected to
arise from the asset (after allowing for the effect of the hedging arrangements)
or from the hedging arrangements themselves.
• A further exception applies where incidental income arises from cash awaiting
investment being placed on deposit, provided that the sums in question and all
income produced are subsequently invested in assets that are not themselves
relevant income-producing assets as soon as reasonably practicable (section
40F(3).
HMRC accept that cash awaiting investment, and interest earned whilst it is on deposit,
has been invested in assets that are not themselves relevant income-producing assets
as soon “as reasonably practicable” where it can be demonstrated that sums have been
invested in line with the stated intentions in the fund prospectus without any
unreasonable delay. For example, if the fund is intended to provide a capital-only return
by reference to an index then provided sums subscribed by investors were used to
purchase the assets required to achieve that aim without undue delay then the exception
would be satisfied. There may also be exceptional circumstances applying, such as
extreme volatility in the markets, so that a delay in investing sums subscribed would be
reasonable provided the delay was not contrived.
However, condition Y1 will not be met where the arrangements are designed to produce
a return for investors that is equivalent, in substance, to interest and such arrangements
will therefore meet the definition of a mutual fund and will be an offshore fund (section
40E(7) – see OFM03115).
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Offshore Funds Manual
OFM03125
Exceptions to meaning of mutual fund: condition Y2: no entitlement
to income or any benefit arising from income – Section 40E(5) Finance Act 2008
Even if a date of termination is stated or determinable under the arrangements, the
arrangements are not a mutual fund if the participants have no entitlement to any income
arising under the arrangements, or to any benefit arising from such income.
An example of an arrangement satisfying this condition might be the capital shares or
units in an arrangement which splits the rights to capital and income between the
holders of different classes of interest, where the holders of capital shares or units are
not entitled to any of the income or any benefit arising from the income.
However, condition Y2 will not be met where the arrangements are designed to produce
a return for investors that is equivalent, in substance, to interest and such arrangements
will therefore meet the definition of a mutual fund and will be an offshore fund (section
40E(7) – see OFM03115).
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Offshore Funds Manual
OFM03130
Exceptions to meaning of mutual fund: condition Y3 – Section 40E(6)
Finance Act 2008
When conditions Y1 and Y2 are not satisfied then the arrangements being considered
may still be excluded from the meaning of a ‘mutual fund’ if condition Y3 is satisfied.
Condition Y3 is satisfied if all of the income produced by the assets that are the subject
of the arrangements (after the deduction of reasonable expenses) is required to be paid
or credited to participants in such a way that any participant who is a UK resident
individual would be charged to income tax on the amounts so paid or credited. That
would include, for example, sums that would be treated as offshore income gains
generated by the sale of investments in underlying non-reporting funds.
‘Reasonable expenses’ is not defined, but HMRC will accept that expenses are
reasonably deducted where they would, broadly, be deductible for a reporting fund in
calculating its reportable income under Chapter 5 of The Offshore Funds (Tax)
Regulations 2009. This would prevent, for example, capital items from being deducted.
Condition Y3 is framed in terms of individuals resident in the United Kingdom
(FA2008/S40E(6)(b)). So, provided that a fund distributes all of the income of the fund
that would be chargeable to income tax in the hands of an individual UK resident and
domiciled investor (if the asset producing the income was directly held by them) then the
fund can satisfy condition Y3. There would, of course, also be a requirement to distribute
to corporate investors but it is the liability to tax (on the underlying income) of individuals
that is the measure of the amounts to be distributed to participants in general.
If a fund would face difficulty in determining the measure of income to be distributed on
the above basis, for example because it is itself invested in another fund(s) and either
the detail of the reporting by that fund(s) is insufficient for this purpose or the information
is received late, then the fund may choose to distribute a measure of income determined
in some other manner (for example, in accordance with that required for a reporting
fund) provided it can be demonstrated that the sum distributed is at least that which
would be required in order to satisfy condition Y3.
Condition Y3 could in theory be satisfied if the arrangements being considered are
transparent for income purposes. However, it would be expected that most income
transparent entities / capital gains opaque entities that were capable of coming within the
definition of an offshore fund, such as so-called “Baker” unit trusts and Fonds Commun
de placement (‘FCPs’), would be open-ended (that is, the fund can issue or redeem units
on request or at particular intervals) and as such none of the exceptions in section 40E
could apply as section 40E(1)(a) has the effect that the exceptions can only apply to
closed-ended arrangements. Regulation 29 of The Offshore Funds (Tax) Regulations
2009 does, however, permit such funds to remain non-reporting funds without an
offshore income gain arising to investors disposing of their interests in them subject to
certain conditions – see OFM10200 for details.
Condition Y3 will not be met where the arrangements are designed to produce a return
for investors that is equivalent, in substance, to interest and such arrangements will
therefore meet the definition of a mutual fund and will be an offshore fund (section
40E(7) – see OFM03115).
Definition of an offshore fund
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Offshore Funds Manual
Definition of an offshore fund
OFM03500
Contents
OFM 03550
OFM 03600
Transparent entities
Application of S103A TCGA 92 to interests in arrangements that
create rights in the nature of co-ownership
Arrangements that are tax transparent for income purposes
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OFM03550
Application of Taxation of Chargeable Gains Act (TCGA) 1992 to
interests in arrangements that create rights in the nature of co-ownership –
Section 103A TCGA 1992
Certain contractual arrangements have historically been treated as transparent for
both income and capital gains purposes (for example, Luxembourg Fonds Commun
de placement (‘FCPs’)). But whilst such funds came within the previous definition of
an offshore fund, the offshore funds regime for taxing offshore income gains was not
applicable as investors were treated as holding, for capital gains purposes, interests
in the underlying assets rather than in the fund itself.
This led to considerable difficulties for investors when they disposed of their interests,
or when new investors were admitted to the fund, as capital gains computations
could become very complex. This is not the case for interests in offshore unit trusts
which were and are subject to section 99 TCGA 1992, so that for the purposes of tax
on chargeable gains a unit trust is treated as if the fund was a company, and the
rights of the participants in the fund were shares in that company.
Section 103A TCGA 1992 was introduced by Part 2 of Schedule 22 Finance Act
2009 to align the treatment of interests in arrangements that create rights in the
nature of co-ownership with that of interests in unit trusts. That is, those
arrangements are treated as opaque for capital gains purposes from the operative
date (see below), so that Section 103A shifts the taxation of gains arising to UK
residents to the time when they dispose of their interest in a fund.
Section 103A does not change the tax treatment of such arrangements for income
purposes – they remain fiscally transparent. Therefore, investors are entitled to
income as it arises (from whatever source or country) and UK investors are taxable
on such income as it arises, regardless of whether income is actually distributed.
Income arising retains its character where arrangements are fiscally transparent, so
for example if a fund receives income from property situated in the UK then UK
investors would be chargeable to tax as if they had received that income directly.
Section 103A will automatically apply with effect from 1 December 2009 for all
interests in such funds held by capital gains tax payers, and for corporation tax
payers from 1 April 2010. Contractual arrangements that come within the meaning of
“mutual fund” at FA2008/S40B are offshore funds as defined at FA2008/S40A and
the charge to tax under regulation 17 of SI2009/3001 will apply on disposals of
interests in such arrangements from the time that rights in the arrangements are
treated as opaque for chargeable gains purposes, unless the arrangements are a
reporting fund or the exception in regulation 29(1) applies (see OFM03600 and
OFM10200).
Acquisition costs for the rights in a relevant fund will be the acquisition costs that
applied immediately before the ‘effective date’ (paragraph 18 Schedule 22 Finance
Act 2009) – that is, the operative dates referred to above, or the date from which an
election for earlier tax years or accounting periods applies (see below).
Transitional arrangements: Elections for earlier tax years and accounting
periods
There is a facility to allow investors with existing interests to elect to treat their
holdings in a relevant fund as opaque for capital gains purposes for previous years –
from the 2003/04 tax year for capital gains tax payers and from accounting periods
beginning on or after 1 April 2003 for corporation tax payers. An election for a
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particular year or accounting period is irrevocable, and will mean that investments in
the relevant fund(s) that is (are) the subject of an election will in all subsequent years
or accounting periods be treated as opaque for capital gains purposes (paragraph 15
Schedule 22 Finance Act 2009).
Elections are to be made by being included in a relevant self-assessment return or
corporation tax return. A return will be a ‘relevant return’ if it is for the tax year, or
accounting period, in respect of which the election is being made, or for a
subsequent year where it is too late to make a return or an amended return for the
first year (or period) in respect of which the election is to apply from (paragraph 16
Schedule 22 Finance Act 2009).
Where an election for opaque treatment is made, the investor is treated as if they had
held an interest in a qualifying offshore fund (that is, one that had distributing fund
status) for all years covered by the election.
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OFM03600
Arrangements that are tax transparent for income purposes
Mutual funds that are tax transparent for income purposes but opaque for capital
gains purposes are within the definition of an offshore fund (unless closed ended and
within the exceptions described at OFM03000 onwards) because, although it is not
possible to roll-up income in the fund itself, it would be possible to do so in a lowertier investment of that fund.
Regulation 29 of The Offshore Funds (Tax) Regulations 2009 provides that, subject
to conditions, disposals of interests in arrangements within the definition of an
offshore fund that are tax transparent for income purposes but opaque for capital
gains purposes (for example, Fonds Commun de placement (‘FCPs’) and so-called
“Baker” foreign unit trusts) will be excluded from offshore income gains treatment
even if the fund is a non-reporting fund, provided broadly that the fund does not itself
invest more than 5% of its total value in other non-reporting funds (see OFM10200
for full details).
Even where regulation 29 is capable of applying, income transparent funds can still
choose to apply for reporting fund status if they wish to because, for example, they
wish to exceed the percentage limit, do not wish to monitor it or they consider that
being approved as a reporting fund will be beneficial in attracting UK investors.
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OFM04000
Act 2008
Umbrella funds & protected cell companies – Section 40C Finance
‘Umbrella arrangements’ means arrangements which provide for separate pooling of
the contributions of investors and the profits or income out of which payments are
made to them. References to part of an umbrella arrangement are to the
arrangements relating to a separate pool (or ‘sub-fund’). Umbrella arrangements will
not themselves be treated as an offshore fund. Instead –
• Each sub-fund and each class of interest is treated as an offshore fund in its
own right,
• The umbrella fund is not treated as an offshore fund,
• The overall arrangements are disregarded.
The same approach applies to an individual cell of a protected cell company.
For umbrella arrangements and protected cell companies, it would usually follow that
each sub-fund has the same residence status as the overall arrangement. In the
case of a non-resident company it would be expected that each sub-fund would also
be non-resident if it was under the “central management and control” of the directors
of the company which constitutes the overall arrangement. In the case of a unit trust
scheme, the trustees of the overall trust arrangements will usually also be the
trustees of each separate arrangement, and so their residence status determines the
residence of the fund, but where there are different trustees for each sub-fund then
each must be considered separately. The “central management and control” test is
also applicable to unit trusts.
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OFM04500
Classes of interest – Section 40D Finance Act 2008
Section 40D deals with a case where there is more than one class of interest in any
arrangements. This includes the case where there is more than one class of interest
in a part of an umbrella arrangement (sub-fund).
Where there is more than one class of interest in a sub-fund, each class of interest is
treated as a separate arrangement and looked at separately for the purpose of
determining whether that class of interest constitutes a mutual fund and an offshore
fund, while the main arrangements are disregarded.
“Class of interest” is not limited to share classes. There may be other forms of
interest which entitle an investor to realise their investment on a basis calculated
entirely or almost entirely by reference to the net asset value of the scheme property
or an index. For example, certain types of loan may give a return which tracks NAV
or is based on an index. A class of interest may also be created as a result of new
issues or conversions of existing rights.
It is possible for an entity, particularly a company, to have a class of interest such as
ordinary shares which does not constitute a mutual fund and another class of interest
which does constitute such a mutual fund.
However, a particular class of shares can only constitute a single class of interest
even if different types of holders of those shares enjoy different rights. For example,
in the case of an exchange traded fund, the creation unit holders who act as market
makers might have the right to redeem or issue shares directly but if that same class
of shares were acquired by another investor on the secondary market then they
would still form part of the same class of interest and satisfy Condition C because, as
a consequence of the market makers’ ability to redeem or create units, all other
investors would expect to be able dispose of their interest at or close to NAV. (See
also OFM05100 regarding exchange traded funds).
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Offshore Funds Manual
Definition of an offshore fund
OFM05000
Particular arrangements
Contents
OFM 05050
OFM 05100
OFM 05150
OFM 05200
OFM 05250
OFM 05300
General
Exchange traded funds
Property investment vehicles
Fixed share capital companies
Share buy backs and share issuance
Limited life companies: general
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OFM05050
Particular arrangements: general
The following pages discuss particular issues with regard to the definition only; for
guidance on the operation of the offshore funds regulations please refer to the
manual contents pages.
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OFM05100
Particular arrangements: exchange traded funds
Exchange traded funds are usually operated in such a way that the quoted prices are
at net asset value (‘NAV’) or very close to NAV, and so would be expected to meet
the characteristics set out in the legislation and to come within the meaning of a
mutual fund, and therefore within the definition of an offshore fund.
As with other classes of interest, it is important to note that fungible shares can only
constitute a single class of interest even if different types of holders of those shares
enjoy different rights (see OFM04500 - Classes of interest).
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OFM05150
Particular arrangements: property investment vehicles
The same considerations apply in determining whether a property investment vehicle
comes within the definition of an offshore fund as apply to any other sort of
arrangements.
So, closed-ended arrangements that do not have a limited life will not come within
the definition as they would not satisfy condition C at FA2008/S40B(5). This would be
the case for overseas arrangements that are equivalent to a UK Real Estate
Investment Trust (‘UK-REIT’), for example, but not to arrangements that are
equivalent to a UK Property Authorised Investment Fund (‘PAIF’) which, like other UK
authorised investment funds, are open-ended.
As is the case for other fund types, HMRC cannot provide a comprehensive list of
different types of overseas property funds that come within the definition of an
offshore fund. The reference to UK-REITs and PAIFs above is solely for the purpose
of illustrating the distinction between types of funds that would or would not come
within the definition of an offshore fund for tax purposes.
The particular terms relating to any arrangements have to be considered in each
case. So, for example, any overseas property fund that is listed and only tradable on
a secondary market but whose price closely tracks NAV because market makers are
able to create and redeem units would, like any ETF, satisfy Condition C.
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OFM05200
Particular arrangements: fixed share capital companies
It is expected that very few fixed share capital companies will fall within the new
definition. So, for example, an investment in a trading or investment company or
group with fixed share capital which does not have limited life (even if local law
provides for continuation votes) would not come within the definition. But under the
characteristics based approach, entities that have fixed share capital and that are
structured in such a way that they share characteristics of open-ended share capital
arrangements (that is, the share capital expands and contracts in response to
demand) will be within the definition.
So, fixed share capital companies that are predicated on the basis that investors are
able to redeem their interest to get a net asset value (or indexed) return or a return
which is very close to net asset value may fall within the new definition (if conditions
A and B at FA2008/S40B are satisfied and none of the exceptions at FA2008/S40E
apply). That will also be the case where there are no redemption rights but the
arrangements have a limited life and a reasonable investor could expect to get a net
asset value return on winding up.
The following pages consider specific examples of fixed share capital arrangements
and their interaction with the offshore funds tax definition in more detail.
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OFM05250
Particular arrangements: share buy-backs and share issuance
The price or value of shares in fixed share capital companies may reflect either a
discount or a premium to the net asset value of the underlying assets. It may also be
the case in some circumstances that there is either directors’ or investors’ discretion
to allow or require the buy-back of shares if there is a discount of a certain level
between the net asset value of the arrangements and the share price.
Provided the share buy-back arrangements are made to prevent the discount
becoming too large by reference to net asset value, and provided a reasonable
investor cannot expect to realise their investment either entirely or almost entirely by
reference to net asset value (or by reference to an index), and there is no
determinable termination date, then such arrangements will be outside the definition
of an offshore fund for UK tax purposes (as Condition C at FA2008/S40B(5) will not
be satisfied). Similar considerations apply where the shares trade at a premium.
For example, if a foreign equivalent of an investment trust was trading at a discount
of 15% to NAV and bought its own shares on the open market to reduce the discount
then, absent any factors that could lead to an investor being able to expect to redeem
their investment at or close to NAV, this would not cause Condition C at
FA2008/S40B(5) to be satisfied: it is clear that before the company commenced to
buy its own shares that some investors would not have been able to redeem their
interest at NAV and that any subsequent reduction in the discount would be due to
normal operation of the market. Without any factors indicating that the company
would act to reduce the discount either having been in place prior to this market
activity or at some point in the future, a reasonable investor could not expect to
realise their investment at or close to NAV.
However, share buy-back arrangements that are specifically designed to provide
tracking to net asset value will cause the company or share class to come within the
definition of offshore fund. This would include any arrangements introduced as a
result of changes to the constitution of a scheme. If a change in the terms of a
scheme result in it coming within the definition of an offshore fund then UK investors
are treated as if they had always held an interest in an offshore fund. If the fund
becomes a reporting fund then investors may be able to make an election under
regulation 48(2) to crystallise any offshore income gain at that point, with any
subsequent gain being subject to chargeable gains treatment (provided the fund
remains a reporting fund). See OFM 09100 and OFM11500 for further guidance.
When considering an investor’s rights, account should be taken of all scheme
documents, promotional documentation or communications to determine what
guarantees or undertakings may have been given to the investor.
An undertaking or guarantee, etc, to buy back or redeem only a part of an investor’s
holding entirely or almost entirely by reference to the net asset value of the property
or an index of any description can still constitute an expectation, so for example if the
fund manager undertook to redeem or buy back an investor’s shares in tranches the
arrangements could still be within the definition.
Warrants or options that give an investor the right to sell shares back to an issuer for
a particular price will not cause Condition C to be satisfied unless the price is
determined by reference to NAV so that the investment can be realised at or close to
NAV. Similarly, rights that carry the option to convert to other classes of interest
would only satisfy Condition C if the new rights themselves permitted an investor to
realise their investment at or close to NAV.
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Where no guarantees or undertakings are given when the arrangements are set up
or the scheme terms are amended, a subsequent buy-back or issue of shares would
not, by itself, give rise to an expectation that a reasonable investor could realise their
investment either entirely or almost entirely by reference to net asset value (or by
reference to an index) and so such arrangements would fall outside the definition of
an offshore fund.
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Definition of an offshore fund
OFM05300
Limited life companies
Contents
OFM 05310
OFM 05320
OFM 05330
OFM 05340
General
Overseas corporate law
Company liquidations
Continuation votes
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OFM05310
Particular arrangements: limited life companies: general
Condition C of FA2008/S40B would be satisfied where arrangements are expected to
terminate at or within a predetermined time and produce a return by reference to the
net asset value of the scheme property. There is no time limit – if arrangements have
a fixed or determinable life then they are capable of coming within the meaning of a
mutual fund and therefore possibly within the definition of an offshore fund, subject to
the exception provided where condition Y at FA2008/S40E(3) is met – see
OFM03115 onwards.
In determining whether arrangements that have a fixed or determinable life are an
offshore fund, it does not matter whether or not a reasonable investor could expect to
realise all or part of an investment by reference to NAV if he or she disposed of an
interest on the open market before the date on which the arrangements were
designed, or could be determined, to terminate. Neither does it matter if shares in the
entity are listed and trade at less than NAV before that date. In both circumstances, it
is sufficient that a reasonable investor could expect to realise their investment by
reference to NAV on termination of the arrangements, and condition C would
therefore be satisfied.
The following pages provide further guidance regarding particular circumstances that
may apply to limited life companies, and the effect on the consideration of whether
arrangements would be viewed as mutual funds.
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OFM05320
Particular arrangements: limited life companies: overseas
corporate law
Under some overseas corporate law, some companies must liquidate under certain
circumstances within a particular time frame. Provided that none of the
characteristics set out in the legislation and referred to in this guidance are met, this
will not, on its own, mean that such arrangements will be within the definition of a
mutual fund, and therefore an offshore fund, for UK tax purposes.
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OFM05330
Particular arrangements: limited life companies: company
liquidations
An investor may have invested in a company or other arrangement which
subsequently goes into liquidation, at which point the investor might reasonably
expect to realise their investment at net asset value. However, if a company or other
arrangement is outside the definition of an offshore fund before it goes into
liquidation, then being in liquidation will not by itself bring that company or
arrangement into the definition of an offshore fund. This also applies in the case of
self-managed wind downs with the subsequent appointment of a liquidator to
complete the liquidation.
This treatment would also extend to the purchase of shares in a company after it has
entered a self-managed wind down or liquidation. This may not be the case, though,
for wind downs and liquidations that are intentionally extended or contrived.
Some overseas companies can be liquidated or reconstructed at any time. If there is
a decision to do so, at the point of the approval of the reconstruction or liquidation the
investors may obtain net asset value. However, the relevant point is whether a
reasonable investor can expect the company to be liquidated or reconstructed in
order to deliver net asset value. It is necessary to consider the reasonable investor’s
expectation to realise their investment either entirely or almost entirely by reference
to net asset value (or by reference to an index) when the company was established
(or when there was a change in the investor’s rights).
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OFM05340
votes
Particular arrangements: limited life companies: continuation
If a closed ended company is subject to a continuation vote that may lead to the
winding up, dissolution or termination of the arrangements that will not by itself mean
that the company will be a mutual fund, and therefore possibly an offshore fund.
See OFM03110 for further guidance on continuation votes.
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The 2009 offshore funds regime
OFM06000
Introduction
Contents
OFM06050
OFM06100
OFM06150
Classification of funds
Umbrella funds
Classes of interest
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OFM06050
funds
The 2009 offshore funds regime: introduction: classification of
In order to determine how an investment, made by a UK investor, in any particular
overseas arrangement will be treated for tax purposes, it is first necessary to
determine whether the arrangement comes within the definition of an ‘offshore fund’
as set out at section 40A(2) FA 2008 – see OFM02000 onwards.
UK investors should be able to get this information from their adviser or directly from
the fund itself. It is the investor’s responsibility to ensure that they know whether they
hold an investment in an offshore fund, as defined at section 40A(2).
Once the UK investor has determined that a particular arrangement is an offshore
fund, they will need to determine whether it is a non-reporting fund or a reporting
fund. A fund will be a non-reporting fund unless Part 3 of the Offshore Funds (Tax)
Regulations 2009 applies, for a period of account. There is a list of funds that come
within the definition of an offshore fund and have successfully applied for reporting
fund status on HMRC’s website. The list is updated on a monthly basis and can be
found at http://www.hmrc.gov.uk/collective/reportingfundlist.pdf.
The regulations set out the detailed rules relating to reporting funds, and to the
taxation of UK investors in reporting and non-reporting funds.
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OFM06100
The 2009 offshore funds regime: introduction: umbrella funds
‘Umbrella arrangements’ means arrangements which provide for separate pooling of
the contributions of the participants and the profits or income out of which payments
are made to them. References to a part of umbrella arrangements are to the
arrangements relating to a separate pool (or ‘sub-fund’). See OFM04000 for details
of how umbrella funds are treated in relation to the definition of an offshore fund.
For the purposes of the detailed rules set out in the regulations, and for this
guidance, where there are umbrella arrangements, then–


any reference to the assets of an offshore fund or the income arising on those
assets is a reference to the part of the assets of the main arrangements that
relate to a particular separate pool (sub-fund); and
any reference to participants in an offshore fund is to investors owning an
interest in a particular separate pool (sub-fund).
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OFM06150
The 2009 offshore funds regime: introduction: classes of interest
Where there is more than one class of interest in arrangements (for example, a
company or sub-fund with different share classes that each carries different rights),
then each class of interest is treated as a separate arrangement. See OFM04500 for
details of how separate classes of interest are treated in relation to the definition of
an offshore fund.
For the purposes of the detailed rules set out in the regulations, and for this
guidance, where there are separate classes of interest, then –



any reference to the assets of an offshore fund is a reference to the assets of
the main arrangements or to the part of the assets of the main arrangements
that relate to a particular separate pool (sub-fund);
any reference to the income of an offshore fund is a reference to the income
of the main fund that is attributable to a particular class of interest or to the
income arising to the part of the assets of the main arrangements that relate
to a particular separate pool (sub-fund); and
any reference to participants in an offshore fund is to investors owning an
interest in a particular class of interest.
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Investors in non-reporting funds
Contents
OFM07000
OFM08000
OFM08500
OFM09000
OFM10000
OFM10500
OFM11000
OFM11500
Introduction
Distributions: the charge to tax
Disposals of interests
Disposals of interests: the charge to tax
Exceptions to the charges to tax
Computation of offshore income gains
Deduction of offshore income gains in computing capital gains
Conversion of a non-reporting fund to a reporting fund
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OFM07000
Investors in non-reporting funds: introduction
Overview
A non-reporting fund is any offshore fund that does not have reporting fund status for
a particular period of account. It is possible that a fund may previously have been a
reporting fund and subsequently became a non-reporting fund, or vice versa.
Whilst a reporting fund has certain obligations to HMRC and to its investors, a nonreporting fund by contrast has no such obligations for UK tax purposes, but it will still
of course have to meet its normal obligations to its investors, and UK investors are
responsible for ensuring that they make correct returns of any income or gains
received from their investment.
Offshore income gains (‘OIGs’)
The main effect for UK investors invested in non-reporting funds, as opposed to
reporting funds, is that on disposal of their interests they will be liable to tax on
income on any gains arising (that is, an offshore income gain, or ‘OIG’). There are
certain exceptions to this – see OFM10000 onwards.
For guidance as to what happens when a reporting fund becomes a non-reporting
fund, and vice versa, see OFM11500 onwards and OFM15500 onwards
Guidance for investors in non-reporting offshore funds
Part 2 of the Offshore Funds (Tax) Regulations 2009 is solely concerned with the
treatment of ‘participants’ (that is, UK investors) in non-reporting funds and the
following pages explain the effect of the regulations.
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Investors in non-reporting funds
OFM08000
Income & distributions: the charge to tax
Contents
OFM08100
OFM08200
OFM08300
OFM08400
General
'Transparent' funds
'Non-transparent' funds
Remittance basis
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OFM08100
general
Investors in non-reporting funds: distributions: the charge to tax:
UK investors with an interest in a fund that falls within the definition of an offshore
fund at section 40A(2) FA 2008 but that is not a reporting fund will, prior to disposing
of all or part of such an interest, only be chargeable to tax on any distributions that
they receive (or are treated as receiving, if a fund is ‘transparent’ for income
purposes).
An offshore fund may take one of several forms – it may be, for instance, a company
with share capital, a unit trust, or a contractual arrangement such as a Fonds
Commun de Placement (‘FCP’). The tax treatment of income and distributions from
each type of arrangement will depend on whether or not it is transparent for income
and the general tax rules relating to the form of income or distribution (for example, if
received from a corporate fund then the income would normally be taxed as a foreign
dividend, but see OFM08400 where the fund is a ‘bond fund’, i.e. one that is
substantially invested in interest type assets).
The detailed guidance regarding UK tax treatment of income from savings and
investments can be found in the Savings and Investment Manual (‘SAIM’), which is
available on the HMRC website at http://www.hmrc.gov.uk. The following pages
provide a summary of the tax treatment of income from offshore funds.
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OFM08200
Investors in non-reporting funds: distributions: the charge to tax:
'transparent' funds
Limited partnerships, which are transparent for income and capital gains tax
purposes, are outside of the offshore funds definition at section 40A(2)(c) FA 2008 as
investors are subject to tax on income and gains as they arise.
Other types of arrangements that are transparent for income purposes but not
transparent for capital gains purposes (Section 99 and 103A TCGA – see OFM03500
onwards) such as, for example, so called ‘Baker’ unit trusts (following the case of
Archer-Shee v. Baker, 11TC749) or certain foreign contractual arrangements (such
as Fonds Commun de Placement (‘FCPs’)) fall within the definition of an offshore
fund.
Income: UK tax treatment of investors
For UK tax purposes the income of an income transparent fund is treated as arising
directly to its investors (UK investors are charged to tax on income arising net of a
deduction for proper expenses of the management of the fund in question, and this is
the case for both unit trusts and contractual arrangements). So, for example, if a fund
receives interest income then UK investors are charged to tax on their proportionate
share of that income as it arises, irrespective of whether or not it is actually
distributed to them. Investors should receive a voucher from the fund to tell them
what proportion of the fund’s income they are entitled to, and the split between
interest, dividends or property income. Investors should ask their fund manager for a
voucher if they do not receive one.
Transparent non-reporting funds with interests in reporting funds (regulation
16)
There is a further point to consider with regard to transparent non-reporting funds
that hold interests in reporting funds. That is, where the underlying reporting fund
does not distribute all of its ‘reportable income’ (see OFM14000 and OFM15500
onwards) then the excess would, if a UK investor held a direct interest in the fund, be
treated as income (regulation 94). To ensure that principle is maintained, regulation
16 provides that where the interest is held by a non-reporting fund which is
transparent for income purposes then the reportable excess will be similarly treated
as additional income in proportion to each investor’s rights.
Transparent non-reporting funds with interests in non-reporting funds
(regulation 29)
If an income transparent offshore fund holds less than 5% by value of its gross
assets in non-reporting funds then provided that was the case throughout the period
that a UK investor held their interest in the top tier fund, an offshore income gain
(OIG) will not arise on disposal of that interest even if that fund is a non-reporting
fund (there is a relaxation of this rule where a transparent fund holds interests in
other non-reporting funds that themselves would not give rise to a charge to tax
under regulation 17 - see OFM10200 for details). Conversely, that will not be the
case where the 5% limit is exceeded during the period that the investor held their
interest. UK investors are responsible for obtaining information relating to whether or
not the 5% limit has been exceeded for a particular period of account, but it is
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expected that funds marketed to UK investors would make this information available
as a matter of routine.
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OFM08300
Investors in non-reporting funds: distributions: the charge to tax:
'non-transparent' funds
Arrangements that are non-transparent for income purposes and that come within the
definition of an offshore fund under section 40A(2)(a) or (b) FA 2008 will either have
corporate form (such as an open-ended investment company) or will be foreign unit
trusts. Foreign unit trusts that are not transparent for income purposes are
sometimes referred to as ‘Garland’ unit trusts (following the case of Garland v
Archer-Shee (15TC693)).
The UK tax treatment of investors for income purposes will depend on the form of the
offshore fund, as explained below.
Corporate funds
Where a fund has corporate form, any distributions received will normally be treated
as foreign dividends. Dividends from offshore funds qualify for the dividend tax credit
(for income tax payers) or are exempt (for corporation tax payers) if they are received
on or after 22 April 2009, subject to one important exception.
Finance Act 2009 introduced an amendment to the Income Tax (Trading and Other
Income) Act applying from 22 April 2009, so that where an offshore fund holds more
than 60% of assets in interest-bearing (or economically similar) form, any distribution
received by UK investors who are subject to income tax is treated as a payment of
yearly interest and will not qualify for a dividend tax credit. The rates applying will be
those applying to interest (section 378A ITTOIA 2005). Fund managers should be
able to tell UK investors if a fund is a ‘bond fund’. Corporation tax payers remain
subject to the bond fund rules in Chapter 3 of Part 6 of CTA 2009.
Non-transparent unit trusts
UK investors in foreign unit trusts that are non-transparent for income purposes are
taxable on their proportionate share of income (as ascertained after the trustees have
met the expenses of administering the trust) when it is indefeasibly allocated to them,
regardless of whether the income is paid to them or accumulated. Unlike the position
for transparent unit trusts (see OFM08200), that income is taxable as miscellaneous
foreign income (under Chapter 8 of Part 5 of ITTOIA 2005, or Chapter 8 of Part 10
CTA 2009) and the tax rates applying will be those applying to such income.
Corporation tax payers are subject to the rules in Chapter 3 of Part 6 of CTA 2009 if
the fund is a bond fund.
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OFM08400
Investors in non-reporting funds: income & distributions: the
charge to tax: remittance basis
Where an investor in a (non-transparent) non-reporting offshore fund is taxed on the
remittance basis then the remittance basis rules apply to income arising from the
holding in that fund as they apply to other income from non-UK sources.
Where the fund is transparent for tax-purposes, then the income will arise from the
underlying assets and not from the fund. In such a case the income may sometimes
arise in the UK (even though the fund itself is domiciled offshore). Where the income
arises in the UK the remittance basis does not apply. Where the income arises
offshore then the remittance rules will apply.
Disposals of interests in non-reporting funds by remittance basis investors
See OFM09250
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Investors in non-reporting funds
OFM08500
Disposals of interests
Contents
OFM08550
OFM08600
OFM08650
OFM08700
OFM08750
OFM08800
Overview
Death of participant
Exchanging interests in one fund or share class for another
Exchanges of securities
Schemes of reconstruction
Exchange of interests in different classes
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OFM08550
Investors in non-reporting funds: disposals of interests:
overview – regulations 32 & 33
Basic Rule
Where a participant has an interest in a non-reporting offshore fund (or in some
circumstances in a reporting fund – see OFM15500 onwards) then there is a disposal
of an asset for the purposes of the regulations if there would be a disposal of the
asset for the purposes of tax on capital gains (under the Taxation of Chargeable
Gains Act 1992 – ‘TCGA’).
Except where the regulations provide otherwise (see OFM10220 concerning
‘protected rights’) the rules in TCGA also apply to determine the identity of disposals
with acquisitions of rights within the same class.
Detailed guidance on disposals for TCGA purposes can be found in the Capital
Gains Manual, on the HMRC website.
There are exceptions to the basic rule as summarised below.
Exceptions to basic rule – departures from rules in TCGA

Death of participant - see OFM08600

Exchange of securities (section 135 TCGA) – see OFM08650

Scheme of reconstruction (Section 136 TCGA) – see OFM08700

Exchange of interests of different classes (section 127 TCGA) – see
OFM08750
Offshore funds that are not companies
For the purposes of determining whether there has been a disposal or not, TCGA
applies to interests in offshore funds that are not companies in the same way as it
applies to interests in companies. This is because TCGA applies to interests in unit
trusts and to other non-corporate offshore funds in the same way as it does to shares
in companies (sections 99 and 103A TCGA).
See OFM03550 for further guidance on the rules relating to offshore funds that do
not take corporate or unit trust form that were introduced in Finance Act 2009 by the
insertion of Section 103A into TCGA.
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OFM08600
Investors in non-reporting funds: disposals of interests: death of
participant – regulation 34
Where a participant in a non-reporting fund dies then the participant’s interest in the
non-reporting fund is deemed to have been disposed of by the deceased person
immediately before the deemed acquisition (on death) by the deceased’s personal
representatives (Regulation 34(1) and Section 62(1)(a) TCGA).
The disposal is deemed to have taken place at a value equal to the value at which
the interest is deemed to be acquired under section 62(1)(a) TCGA by the personal
representatives – that is market value at the date of death.
If the disposal gives rise to an offshore income gain then it is chargeable to income
tax (see OFM09000 to OFM 09450).
An offshore income gain arises and resulting tax becomes payable before the estate
of the deceased person is valued for inheritance tax purposes.
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OFM08650
Investors in non-reporting funds: disposals of interests:
exchanging interests in one fund or share class for another
In certain circumstances TCGA provides that exchanges of one type of interest for
another will not constitute a disposal and acquisition.
Those provisions of TCGA are not applicable in some circumstances in the case of
exchanges involving interests in non-reporting offshore funds as described in the
pages referenced below:

Exchange of securities for those in another company – OFM08700

Schemes of reconstruction – OFM08750

Exchange of interests of different classes – OFM08800
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OFM08700
Investors in non-reporting funds: disposals of interests:
exchanges of securities – regulation 35
Regulation 35(1) prevents section 135 TCGA (exchange of securities for those in
another company treated as not involving a disposal) from applying in any case
where an interest in a non-reporting fund is exchanged for an interest in an entity that
is not a non-reporting fund.
Where such an exchange of interests takes place, and regulation 35(1) means that
section 135 TCGA does not apply, regulation 35(2) then determines that the
exchange will be treated as a disposal of the interests in the non-reporting fund.
The disposal is deemed to have taken place at market value (at the time of the
exchange) for the purposes of calculating the offshore income gain arising to the
person disposing (or deemed to dispose) of the interest.
No Chargeable Loss
While regulation 35 applies in circumstances where an interest in a non-reporting
fund is exchanged for an interest in an entity that is not such a fund it should be
noted that this regulation applies for the purpose of offshore income gains only and
that no capital gain or loss can arise solely as a result of an event to which this
regulation applies.
However where such an exchange does lead to an amount being charged to tax as
an offshore income gain then the acquisition cost on which any later capital gain or
loss is based is the deemed disposal consideration.
Protected Rights under regulation 30
If the holding which is exchanged includes an element of ‘protected rights’ under
regulation 30 then no charge to tax on an offshore income gain will apply to that
element of the holding and there will be no deemed disposal of that element of the
holding.
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OFM08750
Investors in non-reporting funds: disposals of interests:
schemes of reconstruction – regulation 36
Regulation 36 prevents section 136 TCGA (scheme of reconstruction involving issue
of securities treated as an exchange, not a disposal) from applying in any case where
an interest in a non-reporting fund is exchanged for an interest in an entity that is not
a non-reporting fund.
Where such an exchange of interests takes place, and regulation 36(1) means that
section 136 TCGA does not apply, then regulation 36(2) determines that the
exchange will be treated as a disposal of the interests in the non-reporting fund.
The disposal is deemed to have taken place at market value (at the time of the
exchange) for the purposes of calculating the offshore income gain arising to the
person disposing (or deemed to dispose) of their interest.
No Chargeable Loss
While regulation 36 applies in circumstances where an interest in a non-reporting
fund is exchanged for an interest in an entity that is not such a fund it should be
noted that this regulation applies for the purpose of offshore income gains only and
that no capital gain or loss can arise solely as a result of an event to which this
regulation applies.
However where such an exchange does lead to an amount being charged to tax as
an offshore income gain then the acquisition cost on which any later capital gain or
loss is based is the deemed disposal consideration.
Protected Rights under regulation 30
If the holding which is exchanged includes an element of ‘protected rights’ under
regulation 30 then no charge to tax on an offshore income gain will apply to that
element of the holding and there will be no deemed disposal of that element of the
holding.
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OFM08800
Investors in non-reporting funds: disposals of interests:
exchanges of interests in different classes – regulation 37
In any case where a non-reporting fund is constituted by a class of interest in “main
arrangements” (see regulation 6 and section 40D Finance Act 2008) it is possible
that a different class of interest in the same main arrangements may not constitute a
non-reporting fund.
Regulation 37 prevents section 127 TCGA (equation of original shares and new
holding) from applying in any case where an interest in a non-reporting fund is
exchanged for an interest in a fund that is not a non-reporting fund (where those
funds are both constituted by classes of interest in the same main arrangements)
where such an exchange might otherwise constitute a reorganisation within that
section and to which that section would otherwise apply.
Where such an exchange of interests takes place, and regulation 37 means that
section 127 TCGA does not apply, then regulation 36(6) determines that the
exchange will be treated as a disposal of the interest in the non-reporting fund.
The disposal is deemed to have taken place at market value (at the time of the
exchange) for the purposes of calculating the offshore income gain arising to the
person disposing (or deemed to dispose) of their interest.
Where such an exchange does lead to an amount being charged to tax as an
offshore income gain then see OFM11200 for the effect on capital gains.
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Investors in non-reporting funds
OFM09000
The charge to tax on disposal of an interest
Contents
OFM09050
Overview
OFM09100
The charge to tax
OFM09150
The charge to tax: income tax
OFM09200
The charge to tax: corporation tax
OFM09250
Remittance basis
OFM09300
Non-resident settlements
OFM09350
Transfer of assets abroad
OFM09400 Offshore income gains arising to certain non-resident companies
OFM09450
Application of other TCGA provisions
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OFM 09050 Investors in non-reporting funds: charge to tax on disposal of an
interest: overview
Offshore income gains
When there is a gain on the disposal of an interest in an offshore fund then there may
be a charge to income tax or to corporation tax on the amount of the gain, treated as
income.
For the meaning of ‘disposal’ see OFM08550. Note that the meaning, whilst derived
from that used in the Taxation of Chargeable Gains Act 1992 (TCGA), is wider than
used in that Act and, in particular, includes the death of the participant holding an
interest (see OFM08600).
In general the charge to tax is incurred when the disposal is of an interest in an
offshore fund that is not a reporting fund or one that, at any time during the period
when the interest has been held, had not been a reporting fund. However there are
exceptions (see OFM10000 onwards).
The following pages give details of the calculation of the gain and the charge to tax.
Interaction with capital gains
Where there is a charge to tax on an offshore income gain then the amount charged
to tax is deducted from the disposal proceeds for the purpose of calculating any
capital gain so that any gain is not taxed twice (regulation 45 – see OFM11000
onwards).
Losses
Where there is a loss on disposal then the gain for the purposes of tax on an offshore
income gain is nil, that is there is no recognition of losses for the purposes of the
regulations (regulation 42). Accordingly, in a case where there is also a disposal for
the purposes of TCGA, any loss made (calculated in accordance with that Act) may
be treated as a capital loss for the purposes of TCGA.
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OFM 09100 Investors in non-reporting funds: charge to tax on disposal of an
interest: the charge to tax – Regulation 17
Offshore income gains
There is a charge to tax on an offshore income gain (‘OIG’) (regulation 17) when a
person disposes of an interest in either:

a non-reporting offshore fund, or

an offshore fund that has, at some point while the interest has been held,
been a non-reporting fund (but see under “converted funds” below).
An offshore income gain is treated for tax purposes as income arising at the time of
the disposal and is taxable at the appropriate marginal rate for income on the person
making (or treated as making) the disposal (regulation 18). There is also a charge to
tax when a participant makes an election under regulation 48 to crystallise an
offshore income gain (see OFM11500).
Non-reporting funds that were previously reporting funds
Where there is a disposal of an interest in a reporting fund which has previously been
a non-reporting fund then in some circumstances there will be no charge to tax on an
OIG. These are:

Where an election to crystallise an offshore income gain was made by the
participant at the time the fund became a reporting fund (regulation 48(2) see OFM11500).

Where, at the time the fund became a reporting fund, the market value of the
participant’s interest was such that no election to crystallise an offshore
income gain was possible because the resulting offshore income gain would
not have been greater than zero (regulation 48(5) – see OFM11500).
Changes of rights
If a change in the terms of a scheme result in it coming within the definition of an
offshore fund then UK investors are treated as if they had always held an interest in
an offshore fund. If the fund becomes a reporting fund then investors may be able to
make an election under regulation 48(2) to crystallise any offshore income gain at
that point, with any subsequent gain being subject to chargeable gains treatment
(provided the fund remains a reporting fund). See OFM11500 for further guidance
regarding the election.
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OFM 09150 Investors in non-reporting funds: charge to tax on disposal of an
interest: the charge to tax: income tax – Regulation 18
Participants within the charge to income tax
Offshore income gains are charged to tax as miscellaneous income under Chapter 8
of Part 5 of ITTOIA 2005 for the year of assessment in which the disposal is made,
but ITTOIA/S688(1) & 689 do not apply (regulation 18(3)).
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OFM09200
Investors in non-reporting funds: charge to tax on disposal of an
interest: the charge to tax: corporation tax – Regulation 18
Participant within the charge to corporation tax
Offshore income gains are charged to tax as miscellaneous income under Chapter 8
of Part 10 of CTA 2009, for the accounting period in which the disposal is made
(regulation 18(4)).
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OFM09250
Investors in non-reporting funds: charge to tax on disposal of an
interest: remittance basis – Regulation 19
Offshore income gains: remittance basis
Where an individual is not domiciled in the United Kingdom and the remittance basis
applies to the individual for a tax year (see booklet HMRC6 available on the HMRC
website at www.hmc.gov.uk) then the amount of any offshore income gain arising in
that tax year is treated as relevant foreign income of the individual (Chapter 2 Part 8
ITTOIA).
In a case where the individual is the beneficiary of a non-resident settlement and an
offshore income gain arises to the trustees of the settlement then different rules apply
– see OFM09300.
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Investors in non-reporting funds
OFM09300
Contents
OFM09310
OFM09315
OFM09320
OFM09325
OFM09330
OFM09335
Non-resident settlements
Section 87 (and 87A) TCGA attribution rules
Effect of residence and domicile status of beneficiary
Section 87 (and 87A) TCGA attribution rules: example
Example of non-UK domiciled beneficiary not chargeable on
offshore income gain arising prior to 6 April 2008
Example of effect of ‘rebasing’ election
Example of ‘rebasing’ election having no effect
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OFM09300
Non-reporting funds: charge to tax on disposal of an interest:
non-resident settlements: summary - regulations 20, 21 and 24
Offshore income gains arising in non-resident settlement structures
As the trustees are non-UK resident they are not chargeable on an offshore income
gain that arises to them or to an underlying non-UK resident company. Instead there
are rules that can attribute the offshore income gain to a settlor or beneficiary of the
trust.
The total amount of offshore income gains arising to the settlement in a tax year is
designated as ‘the OIG amount’. For each year of assessment, the OIG amount can
result in an offshore income gain being treated as arising to a settlor or beneficiary in
the following ways

Firstly consider if the OIG amount can be attributed to beneficiaries of the
settlement as offshore income gains in accordance with section 87 (and 87A)
TCGA as if it were an amount chargeable to capital gains tax calculated under
section 2(2) of that Act (regulation 20(2) – see OFM09310).

Secondly consider if the OIG amount can be attributed to a settlor or
beneficiaries of the settlement as offshore income gains in accordance with
the Transfer of Assets rules in Chapter 2 Part 13 ITA. This only applies to the
extent the OIG amount has not already been attributed in accordance with
section 87 (and 87A) TCGA attribution rules to a person who is resident or
ordinarily resident in the UK (regulation 21 – see OFM09350).

Any OIG amount that is not attributed in accordance with the first two bullet
points above is carried forward and the same procedure applies in the next
and subsequent tax years.
An offshore income gain arising to a non-resident settlement is not treated as income
of the settlor under Chapter 5 Part 5 ITTOIA (regulation 20(1)).
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OFM09310
Non-reporting funds: charge to tax on disposal of an interest:
non-resident settlements: section 87 (and 87A) TCGA attribution rules –
regulation 20
Effect of section 87 (and 87A) attribution rules on offshore income gains
arising in non-resident settlement structures
If offshore income gains arise to the trustees of a non-resident settlement then, for
the tax year in which the gains arise, you consider first if they can be attributed to a
beneficiary using attribution rules from section 87 (and 87A) TCGA (regulation 20(2)).
These rules are applied with necessary modifications to the capital gains legislation
to make it work with offshore income gains (regulation 20(3)).
These attribution rules also apply where the offshore income gains arise to a nonresident company underlying the non-resident settlement. Section 13 TCGA applies,
with necessary modifications, to attribute offshore income gains arising in a nonresident company (regulation 24). Where the offshore income gain arises to a nonresident company underlying a non-resident settlement section 13(10) TCGA allows
the offshore income gain to be attributed to the trustees of the non-resident
settlement. The attribution rules from section 87 (and 87A) TCGA can then apply to
attribute it to a beneficiary of the settlement.
Similarly attributions can be made via section 89 or Schedule 4C TCGA where those
rules apply instead of section 87 TCGA.
Where there are both offshore income gains and capital gains in a non-resident
settlement structure then any capital payments are matched first with offshore
income gains (regulation 20(4)) – see Example at OFM09320.
General guidance on how section 87 TCGA and related provisions work in relation to
capital gains is available on the HMRC website www.hmrc.gov.uk in the document
“New guidance on Capital Gains Tax changes affecting beneficiaries of Non Resident
Settlements” in the material on Non-resident trusts.
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OFM09315
Non-reporting funds: charge to tax on disposal of an interest:
non-resident settlements: section 87 (and 87A) TCGA attribution rules: effect of
residence and domicile status of beneficiary – regulation 20
Effect of residence / domicile of beneficiary on offshore income gains arising
in non-resident settlement structures that are attributed under section 87 (and
87A) TCGA rules – regulation 20
Beneficiary is UK resident and domiciled
Where attributions are made to a beneficiary who is UK resident or ordinarily resident
and is domiciled in the UK, then the full amount of the offshore income gain attributed
is liable to tax on the beneficiary as income.
Beneficiary is UK resident but non-UK domiciled
Where attributions are made to a beneficiary who is UK resident or ordinarily resident
but non-UK domiciled then, under section 87 (and 87A) TCGA rules, the full amount
attributed may not be chargeable to income tax for the following reasons

Such an individual will not be chargeable to income tax on offshore income
gains attributed to them to the extent that in the matching process
-
a capital payment received before 6 April 2008 is matched, or
-
an OIG amount for the tax year 2007-08, or earlier, is matched
(paragraph 100 Schedule 7 FA 2008).

If the trustees have made a ‘rebasing’ election under paragraph 126 Schedule
7 FA 2008 then such an individual will not be chargeable on the pre-6 April
2008 element of the offshore income gain attributed to them (paragraph 101
Schedule 7 FA 2008).

If such an individual is a remittance basis user they can have the benefit of
the remittance basis via the rules in section 87B TCGA.
The full amount of the offshore income gain attributed to the individual reduces the
OIG amount of the non-resident settlement structure that is available to match with
future capital payments. That is so even though less than the full amount may be
chargeable to income tax on the individual.
Beneficiary is non-UK resident
Offshore income gains can still be attributed to a beneficiary who is not resident or
ordinarily resident in the UK using the section 87 TCGA attribution rules. This applies
even though they may not be chargeable to tax on such an individual. Any such
attribution reduces the OIG amount of the non-resident settlement structure that is
available to match with future capital payments.
General guidance on how section 87 TCGA and related provisions work in relation to
capital gains is available on the HMRC website www.hmrc.gov.uk in the document
“New guidance on Capital Gains Tax changes affecting beneficiaries of Non Resident
Settlements” in the material on Non-resident trusts.
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OFM09320
Non-reporting funds: charge to tax on disposal of an interest:
non-resident settlements: section 87 (and 87A) TCGA attribution rules:
example – regulation 20
Allocating capital payments between offshore income gains and chargeable
gains arising in non-resident settlements – regulation 20(4)
Example where both offshore income gains and capital gains received
A settlement with non-UK resident trustees has never been settlor interested and has
never received any income. The following OIG amounts and capital gains have been
received by the settlement:
2008-09 OIG amount £30,000
2009-10 Chargeable gains £40,000
2010-11 OIG amount £50,000 and chargeable gains £60,000.
The first capital payment out of the settlement is made in 2010-11. That is a capital
payment of £70,000 to a UK resident and domiciled beneficiary.
Regulation 20(4) tells you that you match any capital payments with OIG amounts
arising in the non-resident settlement before matching with chargeable gains. This
applies even if the OIG amount arose in an earlier year than the capital gain.
Using the section 87A TCGA attribution rules the capital payment is matched first
with the entire £50,000 OIG amount arising in 2010-11. Then the remaining £20,000
(£70,000 - £50,000) is matched with £20,000 of the £30,000 OIG amount arising in
2008-09.
The beneficiary is treated as receiving £70,000 offshore income gains chargeable to
income tax in 2010-11.
There are unmatched OIG amounts and chargeable gains in the settlement to carry
forward at 5 April 2011 of:
2008-09 OIG amount £10,000 (£30,000 less £20,000 matched with capital payment)
2009-10 Capital gains £40,000
2010-11 Capital gains £60,000.
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OFM09325
Non-reporting funds: charge to tax on disposal of an interest:
non-resident settlements: attribution rules: example of non-UK domiciled
beneficiary not chargeable on offshore income gain arising prior to 6 April
2008
Example showing how a UK resident but non-UK domiciled beneficiary may
not be chargeable to tax on an offshore income gain arising in a non-resident
settlement prior to 6 April 2008 – paragraph 100 Schedule 7 FA 2008
Example of effect of paragraph 100 Schedule 7 FA 2008
A settlement with non-UK resident trustees has never been settlor interested. The
trustees own all the share capital of a non-UK resident company. Neither the trustees
nor the company has received any income nor made any chargeable gains.
The non-resident company held a material interest in an offshore fund. When that
was disposed of in 2005-06 an OIG amount of £60,000 arose.
The first capital payments to beneficiaries were made in 2010-11 which were:
£40,000 to a UK resident and domiciled beneficiary
£40,000 to a UK resident but non-UK domiciled beneficiary
£40,000 to a non-UK resident beneficiary.
There is a matching of £20,000 of each of these capital payments with the 2005-06
OIG amount. Each beneficiary has £20,000 of offshore income gain attributed to
them via section 87 TCGA rules. There are no unmatched OIG amounts to carry
forward within the non-resident settlement structure.
The UK resident and domiciled beneficiary is chargeable to income tax in 2010-11 on
the £20,000 offshore income gain attributed to them.
The UK resident but non-UK domiciled beneficiary is not chargeable to income tax on
any of the £20,000 offshore income gain attributed to them. This is because the OIG
amount used in the section 87 matching process arose before 6 April 2008 paragraph 100(2)(b) Schedule 7 FA 2008.
The non-UK resident beneficiary is not chargeable to income tax on any of the
£20,000 offshore income gain attributed to them.
There are unmatched capital payments of £20,000 to each beneficiary to carry
forward at 5 April 2011.
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OFM09330
Non-reporting funds: charge to tax on disposal of an interest:
non-resident settlements: attribution rules: example of effect of ‘rebasing’
election
Example showing how a UK resident but non-UK domiciled beneficiary may
benefit from a ‘rebasing’ election – paragraph 101 Schedule 7 FA 2008
Example of effect of ‘rebasing’ election - paragraph 101 Schedule 7 FA 2008
A settlement with non-UK resident trustees is settlor interested because the settlor
can benefit. The trustees own all the share capital of a non-UK resident company.
Neither the trustees nor the company has received any income nor made any
chargeable gains. The trustees have made a ‘rebasing’ election under paragraph 126
Schedule 7 FA 2008.
The non-resident company purchased a material interest in an offshore fund in 200001. This is disposed of in 2010-11 resulting in an OIG amount of £60,000. The post 5
April 2008 element of that OIG amount is £15,000.
The first capital payments made to beneficiaries were made in 2010-11. They were:
£40,000 to a UK resident and domiciled beneficiary
£40,000 to a UK resident but non-UK domiciled beneficiary
£40,000 to a non-UK resident beneficiary.
There is a matching of £20,000 of each of these capital payments with the 2010-11
OIG amount. Each beneficiary has £20,000 of offshore income gain attributed to
them via section 87 TCGA rules. There are no unmatched OIG amounts to carry
forward within the non-resident settlement structure.
The UK resident and domiciled beneficiary is chargeable to income tax in 2010-11 on
the £20,000 offshore income gain attributed to them.
The UK resident but non-UK domiciled beneficiary (where the remittance basis is
used) is only chargeable to income tax on £5,000 (£20,000 x £15,000/£60,000) of the
£20,000 offshore income gain attributed to them. That is the post 5 April 2008
element of the £20,000 offshore income gain attributed to them. This is by virtue of
paragraph 101 Schedule 7 FA 2008.
The non-UK resident beneficiary is not chargeable to income tax on any of the
£20,000 offshore income gain attributed to them.
There are unmatched capital payments of £20,000 to each beneficiary to carry
forward at 5 April 2011.
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OFM09335
Non-reporting funds: charge to tax on disposal of an interest:
non-resident settlements: attribution rules: example of ‘rebasing’ election
having no effect
Example showing how a UK resident but non-UK domiciled beneficiary may
not benefit from a ‘rebasing’ election – paragraph 101 Schedule 7 FA 2008
Example of ‘rebasing’ election having no effect - paragraph 101 Schedule 7 FA
2008
This example has similar facts as that in OFM09330 with the exception that capital
payments are not made to beneficiaries until a year after that in which the OIG
amount arises in the offshore trust structure. In such a case there may be no benefits
of a ‘rebasing’ election to a non-UK domiciled beneficiary in respect of any offshore
income gain attributed to them.
A settlement with non-UK resident trustees is settlor interested because the UK
resident and ordinarily resident, but non-domiciled, settlor can benefit. The trustees
own all the share capital of a non-UK resident company. Neither the trustees nor the
company has received any income nor made any capital gains. The trustees have
made a ‘rebasing’ election under paragraph 126 Schedule 7 FA 2008.
The non-resident company purchased a material interest in an offshore fund in 200001. This is disposed of in 2010-11 resulting in an OIG amount of £60,000. The post 5
April 2008 element of that OIG amount is £15,000.
The first capital payments made to beneficiaries were made in 2011-12. They were:
£40,000 to a UK resident and domiciled beneficiary
£40,000 to a UK resident but non-UK domiciled beneficiary (who was also the settlor)
£40,000 to a non-UK resident beneficiary.
In 2010-11 there have been no capital payments in that year, or earlier years, to
beneficiaries. So there can be no attribution of the OIG amount to beneficiaries under
the section 87 attribution rules in regulation 20.
We then have to consider if there can be an attribution under the transfer of assets
rules in regulation 21 for 2010-11. The entire £60,000 OIG amount can be attributed
to the settlor as an offshore income gain for that year. The non-UK domiciled settlor
is chargeable to income tax in 2010-11 on the £60,000 offshore income gains
attributed to them, subject to any remittance basis considerations. The ‘rebasing’
election has no effect on the amount chargeable to income tax as the attribution has
not been made via the section 87 attribution rules.
The OIG amount is reduced to Nil (regulation 21(6)). There are no unmatched OIG
amounts to carry forward to 2011-12. There is nothing to match with the capital
payments made in 2011-12 so the full amount of those payments are unmatched
capital payments to carry forward at 5 April 2012.
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OFM 09350 Investors in non-reporting funds: charge to tax on disposal of an
interest: transfer of assets abroad – Regulation 21
Effect of transfer of assets abroad rules on an offshore income gain
When an offshore income gain (OIG) arises to a person resident or domiciled outside
the United Kingdom then legislation relating to the transfer of assets abroad applies
in relation to that OIG as if the amount were foreign income becoming payable to that
person. The relevant legislation is at Chapter 2 Part 13 ITA 2007.
This regulation is subject to two exceptionsException 1 – non resident settlements (regulation 21(4) and (5))
This rule does not apply to an OIG (or a part of an OIG) that arises to the trustees of
a non-resident settlement and which is consequently treated as arising to an
individual resident or ordinarily resident in the United Kingdom. Instead the rule
relating to OIGs arising to non-resident settlements will take precedence (see
OFM09300).
Where this exception applies to an OIG (or part of one) then this exception applies in
that tax year and any future tax year to the OIG (or part OIG) treated as arising to a
person resident or ordinarily resident in the United Kingdom (irrespective of whether
or when that treatment leads to a tax charge).
Exception 2- OIG treated as arising to person resident or ordinarily resident
(regulation 21(3))
This rule does not apply to an OIG that arises to an offshore company and is, as a
result of the rule described at OFM09400, treated as arising to a person resident or
ordinarily resident in the UK as a result of the gain.
Amounts carried forward in non-resident settlements
When, as a result of this regulation and Chapter 2 Part 13 ITA, foreign income is
treated as arising to a person in a tax year then any OIG amount for a non-resident
settlement (see regulation 20(2) and OFM09300) is reduced from the following tax
year by the amount of the income.
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OFM 09400 Investors in non-reporting funds: charge to tax on disposal of an
interest: offshore income gains arising to certain non-resident companies –
Regulation 24
Attribution of gains to members of non-resident companies
Section 13 TCGA applies to offshore income gains (with appropriate modifications) in
the same way as it applies to capital gains.
In summary it applies to offshore income gains arising to non-resident companies
which would be close companies if they were resident in the United Kingdom.
An offshore income gain of the company is treated as an offshore income gain of a
member of the company in proportion to the member’s interest as a participator in the
company (provided that the member’s share of the gain is at more than one tenth of
the whole gain after aggregation with that of connected persons).
This regulation takes precedence over the transfer of assets abroad rules
(OFM09350 – see exception 2)
More detailed guidance on the application of section 13 TCGA is provided in the
Capital Gains Manual.
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OFM 09450 Investors in non-reporting funds: charge to tax on disposal of an
interest: application of other TCGA provisions
Certain provisions relating to capital gains tax (or to corporation tax on chargeable
gains) also have effect in relation to income tax or corporation tax on offshore income
gains (OIGs).

A person is chargeable to tax on OIGs arising during a year of assessment for
any part of which they are resident in the UK (or if they are ordinarily resident
in that year) (regulation 22(1)(a) and section 2(1) TCGA).

A person carrying on a business in the UK through a branch or agency or a
company with a UK permanent establishment is chargeable to tax on OIGs
arising on the disposal of a holding in an offshore fund if the holding was held
for the purposes of the UK branch, agency or permanent establishment
(regulation 22(1)(b) and (c) and sections 10 and 10B TCGA).

An individual who is temporarily non-resident (within the meaning of section
10A TCGA) is chargeable to income tax on offshore gains arising during the
period of temporary non-residence in the year of return to the UK (Section
10A TCGA as modified by regulation 23).
Detailed guidance on the application of TCGA in each of these cases can be found in
the Capital Gains Manual. In each case the regulations apply the provisions of TCGA
to tax on offshore income gains in the same way as those provisions ordinarily apply
to tax on chargeable gains.
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Investors in non-reporting funds
OFM10000
Exceptions to the charge to tax
Contents
OFM10020
OFM10040
OFM10060
OFM10080
OFM10100
OFM10120
OFM10140
OFM10160
OFM10180
OFM10200
OFM10220
OFM10240
OFM10260
General
Interests treated as loan relationships
Interests treated as derivative contracts
Intangible fixed assets
Excluded indexed securities
Rights arising under a policy of insurance
Trading stock
Long-term insurance funds
Non-participating loans
Interests in certain transparent funds
Rights in certain existing holdings
Charitable companies & charitable trusts
Registered pension schemes
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OFM10020
general
Investors in non-reporting funds: exceptions to the charge to tax:
The purpose of the offshore fund regime is to ensure that income cannot be rolled up
free of tax with any subsequent gain on disposal being taxed only as a capital gain.
Both the 1984 and 2009 rules achieve this by charging any gains on disposals of
interests in arrangements that do not distribute, or report income, to tax as income
(‘offshore income gains’, or ‘OIGs’).
However, where it is not possible to roll-up income in such a way that it would not be
taxed as income then there is no need to apply the offshore funds rules. This may be
the case where a tax charge is imposed by other parts of the Tax Acts on income
arising from an investment in arrangements that may come within the definition of an
offshore fund. There are also other circumstances where it would not be desirable to
charge a disposal of an interest in an offshore fund to tax as an OIG. The Offshore
Funds (Tax) Regulations 2009 therefore set out specifically when a charge to tax on
an OIG will not arise. Most of the exceptions are carried forward from the legislation
in ICTA that applied to the 1984 regime.
The following pages provide guidance on the exceptions in the regulations.
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OFM10040
Investors in non-reporting funds: exceptions to the charge to tax:
interests treated as loan relationships – Regulation 25(2)
Certain investments in offshore funds are treated as loan relationships under Chapter
3 of Part 6 Corporation Tax Act (‘CTA’) 2009 if they are held by a UK company.
Further guidance on when such treatment applies can be found in the Corporate
Finance Manual (‘CFM’) on the HMRC website at http://www.hmrc.gov.uk.
All income arising from a corporate holding in an offshore fund that is treated as a
creditor relationship will be regarded as a loan relationship credit, as will the relevant
fair value movement in the value of the holding.
This means that corporate investors will be charged to corporation tax on any
distributions received and also their proportionate share of income arising to the fund
under the loan relationships rules and accordingly regulation 25(2) prevents an OIG
charge from arising in relation to any periods when the loan relationships rules apply.
Interests not treated as loan relationships for entire period held
It is possible that an interest in an offshore fund might not be treated as a loan
relationship for the entire period that an interest in an offshore fund is held, because
the test that determines that matter is applied to each period for which the investing
company prepares accounts. There are rules in Chapter 3 of Part 6 CTA 2009 that
determine what happens on acquiring or disposing of a loan relationship (see the
CFM for further details). The effect is to treat any gains on disposal for periods when
a contract is not treated as a loan relationship as an offshore income gain, but an
OIG will not arise in respect of any gains relating to periods where the loan
relationship rules apply.
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OFM10060
Investors in non-reporting funds: exceptions to the charge to tax:
interests treated as derivative contracts – Regulation 25(3)
Certain investments in offshore funds are treated as derivative contracts under Part 7
Corporation Tax Act (‘CTA’) 2009 if they are held by a UK investor subject to
corporation tax.
Further guidance on when such treatment applies is set out in the Corporate Finance
Manual (‘CFM’) on the HMRC website - see http://www.hmrc.gov.uk. In summary,
where a company acquires a holding in an offshore fund that is not a direct holding,
but a financial instrument based on such a holding and in consequence the company
is party to a relevant contract that is not otherwise a derivative contract as defined in
the legislation, that holding will be treated as a derivative contract (a ‘relevant
contract’ in the terms of CTA).
A ‘relevant contract’ is treated as if it was a derivative contract and any profits or
losses thereon are computed on a fair value basis of accounting.
This means that corporate investors will be charged to corporation tax on their
proportionate share of any income arising to the fund that is the subject of the
contract under the derivative contracts rules and accordingly regulation 25(3)
prevents an OIG charge from arising in relation to any periods when those rules
apply.
Contract not a ‘relevant contract’ for entire period held
It is possible that a contract may not be treated as a relevant contract for the entire
period that it is held. There are rules in Chapter 3 of Part 6 CTA 2009 that determine
what happens on acquiring or disposing of a relevant contract (see the CFM for
further details). The effect is to treat any gains on disposal for periods when a
contract is not a relevant contract as an offshore income gain, but an OIG will not
arise in respect of any gains relating to periods where the derivative contract rules
apply.
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OFM10080
Investors in non-reporting funds: exceptions to the charge to tax:
intangible fixed assets – Regulation 25(4)
Where a company has a holding in an offshore fund and that holding would be
subject to the tax rules relating to intangible fixed assets as set out in Part 8 of CTA
2009, then for so long as that is the case the holding will be subject to the intangible
fixed asset rules.
Those rules contain their own detailed provisions relating to holdings of such assets,
and where they apply then any gain on disposal of such an asset will not be treated
as an offshore income gain.
Detailed guidance on the treatment of intangible fixed assets can be found in the
Corporate Intangibles Research & Development Manual (CIRD), on the HMRC
website at http://www.hmrc.gov.uk.
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OFM10100
Investors in non-reporting funds: exceptions to the charge to tax:
excluded indexed securities – Regulation 25(5)
ITTOIA05/S433 explains the meaning of ‘excluded indexed securities’. They are
outside the deeply discounted security rules, and are instead taxed under the capital
gains rules. There is further guidance on excluded indexed securities in the Savings
and Investment Manual (‘SAIM’), on the HMRC website at http://www.hmrc.gov.uk .
Where an interest in an offshore fund would fall to be treated as an excluded indexed
security, any gain arising on disposal will not be taxed as an offshore income gain, in
order that the capital gains treatment is preserved.
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OFM10120
Investors in non-reporting funds: exceptions to the charge to tax:
rights arising under a policy of insurance – Regulation 25(6)
Where an interest in an offshore fund would fall to be treated as rights under a policy
of insurance, any gain arising on disposal will not be taxed as an offshore income
gain.
Guidance on the tax treatment of policy holders can be found in the Insurance
Policyholder Taxation Manual (IPTM) on the HMRC website at http://www.hmrc.gov.uk.
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OFM10140
Investors in non-reporting funds: exceptions to the charge to tax:
trading stock – Regulation 26
Where an interest in an offshore fund is held as trading stock or its disposal is
otherwise taken into account in computing the profits of a trade then the profit on
disposal will not also be taxed as an offshore income gain.
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OFM10160
Investors in non-reporting funds: exceptions to the charge to tax:
long-term insurance funds – Regulation 27
Where an interest in an offshore fund that is an asset of an insurance company’s
long-term insurance fund is disposed of, any gain arising on disposal will not be
taxed as an offshore income gain.
In this context, ‘insurance company’ and ‘long-term insurance fund’ have the same
meaning as in section 431(2) of ICTA. A long-term insurance fund is, broadly, the
funds that an insurance company maintains to meet its long term liabilities, such as
payments to annuitants.
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OFM10180
Investors in non-reporting funds: exceptions to the charge to tax:
non-participating loans – Regulation 28
Where an asset is disposed of and it consists of a loan made to an offshore fund on
such terms that the loan is not a participating loan, then any gain arising on disposal
will not be taxed as an offshore income gain.
A ‘participating loan’ is a loan where the amount payable on redemption exceeds the
issue price by an amount which is determined in whole or in part by reference to the
income of the non-reporting fund. So, for example, a loan made to an offshore fund
on the basis of charging a particular rate of interest, and where the outstanding
balance was determined by reference to the principal remaining unpaid plus any
accrued interest charges, would not be subject to an offshore income gain if that loan
was assigned to another party for a sum that resulted in a gain arising.
The purpose of this regulation is to ensure that a loan made to an offshore fund on
normal commercial terms (and which does not represent an ‘equity’ interest in the
fund) is not treated as an interest in the fund for tax purposes.
Conversely, if the terms of a loan are such that it gives the lender the right to
participate in the income of the fund, then it will be within the terms of the offshore
funds rules and its disposal may give rise to an offshore income gain.
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OFM10200
Investors in non-reporting funds: exceptions to the charge to tax:
interests in certain transparent funds – Regulation 29
Limited partnerships, which are transparent for income and capital gains tax
purposes, are outside of the offshore funds definition at section 40A(2)(c) FA 2008 as
investors are subject to tax on income and gains as they arise.
Other types of arrangements that are transparent for income purposes but not
transparent for capital gains purposes (Section 99 and 103A TCGA – see OFM03500
onwards) such as, for example, certain unit trusts (following the case of Archer-Shee
v. Baker) or certain foreign contractual arrangements (such as Fonds Commun de
Placement (‘FCPs’)) fall within the definition of an offshore fund. They are therefore
subject to the Offshore Funds (Tax) Regulations 2009 (SI2009/3001) generally, with
certain modifications as described below.
The purpose of the offshore fund regime is to ensure that income cannot be rolled up
free of tax, with any subsequent gain on disposal being charged only as a capital
gain. If a fund is transparent for income, such as would be the case for certain unit
trusts and contractual funds, then any income arising to the fund is treated as arising
to an investor in proportion to his rights. This means that income is charged to tax as
it arises.
However, it might be the case that an income transparent fund that came within
paragraph (b) or (c) of section 40A(2) of FA 2008 itself invested in a non-reporting
fund, and if that were the case then income could be rolled up in the underlying fund,
because income would only be credited to the top fund if it was distributed.
In order to counter potential roll-up of income by an income transparent fund in
underlying non-reporting funds, whilst also preventing unnecessary administrative
burdens for transparent arrangements coming within the definition of an offshore fund
and for their investors, any gain on disposal of an interest in an income transparent
offshore fund will not be taxed as an offshore income gain unless 
during a period beginning on the date the interest (or any part of it) was
acquired and ending on the date of the disposal, the offshore fund at any time
held interests in other non-reporting funds (except for certain other
transparent funds – see below) which amounted in total to more than 5% by
value of the offshore fund’s assets (Regulation 29(2)), or

the transparent fund is a non-reporting fund, and the fund fails to make
sufficient information available to participants in the fund to enable those
participants to meet their tax obligations in the United Kingdom with respect to
their shares of the income of the fund (Regulation 29(3)).
Whilst this does mean that transparent funds will have to monitor their underlying
investments, it allows such funds to avoid the need to apply for reporting fund status
(and for their UK investors to be charged only capital gains tax or corporation tax on
an capital gain arising, rather than incurring an offshore income gain, provided the
fund has complied with Regulation 29(2)).
It follows that if a transparent offshore fund is invested by more than 5% by value of
its total investments in non-reporting non-transparent funds it may apply for reporting
fund status in order to allow UK investors to be charged to tax on capital gains on
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disposal rather than to an offshore income gain. If reporting fund status is granted
then the fund will be subject to the requirements of the regulations, including those
relating to the calculation of income from non-reporting funds (see regulations 69 to
71).
Investments by transparent non-reporting funds in other transparent nonreporting funds – Regulation 29(4)
There is one important relaxation to the requirements of regulation 29(2). That is, if a
transparent non-reporting fund (‘TNRF1’) invests in another TNRF (TRNF2) then,
where a disposal of an interest in TNRF2 would not itself give rise to an offshore
income gain (under regulation 17) for a UK investor, it is ignored in determining
whether TNRF1 is invested in non-reporting funds by more than 5% of the value of its
assets in total. This is because in such circumstances there can be no significant rollup of income in the underlying fund(s).
This means that a TNRF’s investments could, for example, consist wholly of interests
in other underlying TNRFs that themselves held only, say, UK property. Or, a TNRF
could be the top layer fund in a fund of funds structure with multiple layers of other
TNRFs below the top fund, provided that each of those underlying TNRFs
themselves did not hold more than 5% by value of their assets in total in other nontransparent, non-reporting funds.
In deciding whether the investee fund qualifies under this regulation this rule may be
applied to the investee fund and to any funds in which it, in turn, holds investments.
Provision of information to participants
If a fund is unable to provide sufficient information to its UK investors to enable them
to meet their UK tax obligations then an offshore income gain will be charged on any
gains realised on subsequent disposals of relevant interests. The provision of
‘sufficient information’ would include details of an investor’s proportionate share of
both income arising to the fund and reported income or offshore income gains arising
to it, as well as confirmation as to whether or not the fund has invested more than 5%
by value of its assets in non-reporting funds. In practice, many existing income
transparent funds with UK investors already provide vouchers to those clients
detailing income arising to the fund, for example interest income, and foreign or UK
dividends.
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OFM10220
Investors in non-reporting funds: exceptions to the charge to tax:
rights in certain existing holdings – Regulation 30
Some UK investors will have acquired rights before the definition of an offshore fund
at section 40A(2) FA 2008 took effect on 1 December 2009, and those rights may not
have constituted a ‘material interest’ in an offshore fund (within the meaning of
section 759 ICTA) under the 1984 offshore funds regime. Such investors may have
invested on the understanding that any gains arising would be charged to either
capital gains tax or to corporation tax as a capital gain.
In order to preserve the treatment that such investors expected when they acquired
their interests, where such interests are disposed of then any gain arising on disposal
will not be taxed as an offshore income gain provided that –


the rights were acquired before 1st December 2009, or
the rights were acquired on or after 1 December 2009 but in accordance with
a legally enforceable agreement in writing that was entered into by the
investor before 30th April 2009 (the publication date for Finance Bill 2009).
If the agreement was conditional, the conditions must have been met before 1
December 2009 and not varied on or after that date.
See OFM10800 for the rules that apply when an investor holds such grandfathered
interests and acquires further interests in the same fund which themselves are
subject to the regulations.
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OFM10240
Investors in non-reporting funds: exceptions to the charge to tax:
charitable companies & charitable trusts – Regulation 31
Disposals of interests in non-reporting offshore funds held by charitable companies
(as defined in section 506 ICTA) or charitable trusts (as defined in section 519 ITA)
are exempt from any charge to corporation tax or income tax in respect of an
offshore income gain provided the gain is ‘applicable and applied for charitable
purposes’ (regulation 31 / section 535 of ITA 2007).
If interests in non-reporting offshore funds held by charitable companies or charitable
trusts cease to be subject to charitable trusts (note that property held by charitable
companies is subject to a trust arrangement), and an offshore income gain would
arise on accrued gains on a disposal at that time, then the trustees are treated as if
they had disposed of and immediately reacquired that property for a consideration
equal to its market value. An offshore income gain accruing on the disposal arising
under this paragraph is treated as an offshore income gain not accruing to a charity,
and is subject to corporation tax or income tax accordingly.
Property will ‘cease to be subject to charitable trusts’ when a charity loses its
charitable status, for example if the charity is a ‘time charity’, i.e. an arrangement
such as that where assets are held on charitable trusts under the terms of a will and
the income applied for charitable purposes until such time as a minor reaches a
particular age; when the assets are passed to the ultimate beneficiary chargeable
gains, or here an offshore income gain, would arise on the transfer of the assets.
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OFM10260
Investors in non-reporting funds: exceptions to the charge to tax:
registered pension schemes – Section 186 Finance Act 2004
If a UK registered pension scheme (within the meaning of section 153 FA 2004)
disposes of an interest in a non-reporting fund, any gain arising will be exempt from
the charge to tax under regulation 17.
Similarly, S186(1)(a) would have the effect that an offshore income gain would not be
chargeable on a pension fund if it were attributed under regulation 24.
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Investors in non-reporting funds
OFM10500
Computation of offshore income gains
Contents
OFM10550
OFM10600
OFM10650
OFM10700
OFM10750
OFM10800
Introduction
The basic gain
Previous no gain / no loss disposals
Modification of chargeable gains legislation
Losses
Certain existing holdings
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OFM10550
Investors in non-reporting funds: computation of offshore
income gains: introduction – Regulation 38
An offshore income gain (‘OIG’) will arise when a UK investor disposes of an interest
in –



a non-reporting fund;
a reporting fund that has not held reporting fund status for the entire period
during which the investor held their interest;
a reporting fund which was previously a non-qualifying fund (i.e. one that did
not hold distributing fund status) for the entire period during which the investor
held their interest (and in respect of which no election was made under
paragraph (4) of Schedule 1 to the Offshore Funds (Tax) Regulations 2009)
and a ‘basic gain’ arises on such a disposal.
The OIG will be an amount equal to the basic gain. The following pages explain that
term, and the more detailed provisions that apply to such disposals.
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OFM10600
Investors in non-reporting funds: computation of offshore
income gains: the basic gain – Regulation 39
Where an offshore income gain falls to be charged on the disposal of an interest in
an offshore fund, it will be equal to the ‘basic gain’. The basic gain is an amount
equal to –

in the case of a participant (i.e. investor) chargeable to income tax, the
amount which would be the gain on that disposal for the purposes of TCGA
1992 without any taper relief;

in the case of a participant chargeable to corporation tax, the amount which
would be the gain on that disposal for the purposes of TCGA 1992 without
any indexation allowance.
It can be seen from this that an offshore income gain is essentially equal to the
increase in value of the investor’s holding over the period it was held, with no
provision for reducing that gain by taper relief or deduction of indexation. This is
because the charge to tax on an offshore income gain is a charge on income,
although it is calculated in accordance with the rules in TCGA 1992 with relevant
modifications.
TCGA92/S37(1) would exclude any sums that have been charged to tax as income
from being taken into account in the computation of the ‘basic gain’. So, for example,
if it was possible that an entity could come within the controlled foreign companies
rules and also within the definition of an offshore fund then any sums charged to tax
as income under the CFC rules would be excluded from the computation of the basic
gain. Further guidance on the CFC rules can be found in the International Manual
(‘INTM’) at http://www.hmrc.gov.uk.
Note that the computation of the basic gain is subject in all cases to the following
regulations —
(a) regulation 34 (provisions applicable on death) – see OFM08600;
(b) regulation 35 (application of section 135 of TCGA 1992) – see OFM08700;
(c) regulation 36 (application of section 136 of TCGA 1992) – see OFM08750;
(d) regulation 37 (exchange of interests of different classes – see OFM08800;
(e) regulation 40 (earlier disposal to which the no gain/no loss basis applies); –
see OFM10650;
(f) regulation 41 (modifications of TCGA 1992) – see OFM10700;
(g) regulation 42 (losses) – see OFM10750;
(h) regulation 43 (special rules for certain existing holdings) – see OFM10800.
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Offshore Funds Manual
OFM10650
Investors in non-reporting funds: computation of offshore
income gains: previous no gain / no loss disposals – Regulation 40
When one group company disposes of an asset to another group company, there will
not ordinarily be a chargeable gain or loss for corporation tax purposes on that
disposal. This is the result of the no gain / no loss rule in section 171(1) TCGA1992
(for further details see the Capital Gains Manual available on the HMRC website at
http://www.hmrc.gov.uk/manuals/cg1manual/).
The rule states that, ordinarily, if one member of a group disposes of an asset to
another member of the group, and the asset remains within the scope of corporation
tax on chargeable gains, the consideration is taken to be such an amount as results
in no gain/no loss for the transferor. The no gain/no loss rule fixes both the
consideration received for the asset by the transferor and the consideration given for
the asset by the transferee. The transferor has neither a chargeable gain nor an
allowable loss. The transferee effectively takes over the transferor's capital gains
cost, as augmented by indexation up to the time of the transfer under section 56(2)
TCGA 1992.
This rule is modified by regulation 40 when the asset transferred is an interest in an
offshore fund. Where that is the case, then the basic gain on the disposal is
computed as if no indexation allowance had been available on any such earlier
disposal and, subject to that, neither a gain nor a loss had arisen to the group
member making the earlier disposal.
Example
Transfer of interest from Company A to Company B
(1)
(2)
Market value of asset at transfer
Acquisition cost
Indexation allowance to date of transfer
Indexed gain
250,000
(80,000)
(20,000)
150,000
Deemed acquisition cost (no gain / no loss)
100,000
Disposal of holding by Company B
Proceeds
Deemed acquisition cost
less
indexation on previous no gain / no loss transfer
275,000
100,000
(20,000)
(80,000)
195,000
‘Basic gain'
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Offshore Funds Manual
OFM10700
Investors in non-reporting funds: computation of offshore
income gains: modification of chargeable gains legislation – Regulation 41
Roll-over relief on transfer of business
Usually, where a 'person’ (but not a ‘person’ who is a company) transfers a business
to a company as a going concern, together with the whole assets of the business (or
the whole of those assets other than cash), in exchange for shares issued by the
business, any gain arising on the transfer of the assets is effectively deferred if the
relevant conditions in Section 162 of TCGA 1992 are met (roll-over relief on transfer
of business - see the Capital Gains Manual (‘CGM’) on the HMRC website at
http:/www.hmrc.gov.uk.
Where, however, one or more of the assets that form part of the transfer is an
interest in an offshore fund then the basic gain arising on such a disposal is
computed without regard to any deduction which would otherwise fall to be made
under section 162 in computing a chargeable gain – in other words, the gain is not
deferred, but is immediately charged as an offshore income gain.
Relief for gifts of business assets / Gifts on which inheritance tax is chargeable
etc
Where any part of a disposal that is not on an arm’s length basis and which is subject
to a claim for relief under either section 165 (relief for gifts of business assets) or
section 260 of TCGA 1992 (gifts on which inheritance tax is chargeable etc - see the
Capital Gains Manual for further details) the claim does not affect the computation of
the basic gain arising on the disposal. In other words, no part of the basic gain can
be held over.
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Offshore Funds Manual
OFM10750
Investors in non-reporting funds: computation of offshore
income gains: losses – Regulation 42
If, in calculating the ‘basic gain’ (under regulations 39 to 41) arising on the disposal of
an interest in an offshore fund the result would produce a loss, then the basic gain
arising on the disposal is treated as nil. This means that, for the purposes of the
regulations, no loss is to be treated as arising on a disposal and that any loss arising
can be relieved only as a capital loss.
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Offshore Funds Manual
OFM10800
Investors in non-reporting funds: computation of offshore
income gains: certain existing holdings – Regulation 43
An investor may hold rights in a fund which comes within the definition of an offshore
fund at section 40A(2) FA 2008 but which are subject to the grandfathering
provisions in regulation 30 (see OFM10220) because, for example, the fund was
either not an offshore fund under the previous definition at section 756A ICTA 1988
or it was but the investor did not hold a ‘material interest’ (as defined at section 759
ICTA, and which is a concept that no longer applies under the 2009 regime).
Where this is the case and an investor holding such grandfathered interests acquires
further interests in the same fund which themselves are subject to the regulations,
then, on making any subsequent disposals, it will be necessary to identify precisely
which rights are being disposed of. In considering that, section 104 TCGA 1992
(share pooling: general interpretative provisions) applies as if the protected (i.e.
grandfathered) rights were assets of a different class from the non-protected rights,
and all of the protected rights must be treated as disposed of before any of the nonprotected rights.
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Offshore Funds Manual
Investors in non-reporting funds
OFM11000
Deduction of offshore income gains in computing capital gains
Contents
OFM11050
OFM11000
OFM11150
OFM11200
Introduction
Treatment of the disposal - general
Rollover relief (S162 TCGA)
Consideration on a reorganisation (S128 TCGA)
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Offshore Funds Manual
OFM11050
Investors in non-reporting funds: deduction of offshore income
gains in computing capital gains: introduction – Regulation 44
A disposal of an interest in an offshore fund may give rise to an offshore income gain
but because the rules relating to when a disposal arises are based on the rules for
disposals for capital gains purposes within TCGA 1992, with suitable modifications, it
is likely that there will be a disposal for the purposes of capital gains as well.
Clearly, to apply two separate charges (one on income on any offshore income gain,
and one on any capital gain) would potentially lead to double taxation. There are
therefore provisions within the regulations that set out how to calculate capital gains
when an offshore income gains arises on a disposal. Those provisions are explained
in the following pages.
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Offshore Funds Manual
OFM11100
Investors in non-reporting funds: deduction of offshore income
gains in computing capital gains: treatment of the disposal - general –
Regulation 45
Where there is a disposal of an interest in an offshore fund which has given rise to an
offshore income gain and which would also be a disposal for the purposes of TCGA
1992 (as is likely to be the case), then without some form of deduction for the sum
charged as an offshore income gain there could be a double charge to tax (one on
income, and one on gains).
Section 37(1) TCGA 1992 gives relief where the consideration for a disposal of
assets has been subject to a charge to tax on income in other circumstances, and
regulation 45 has effect in substitution of that part of TCGA so that an offshore
income gain is deducted from the sum that would otherwise be taken as the value of
the consideration on disposal for TCGA purposes. In many cases this will eliminate
any charge to tax on a capital gain.
Where there is a part-disposal so that section 42 of TCGA applies to determine the
apportionment of acquisition costs to the disposal then the full amount of disposal
consideration is taken into account for the purposes of the calculation required by
that section – that is, the offshore income gain is not deducted from the disposal
consideration for the purposes of calculating the part disposal fraction at section
42(2) (for further details relating to part-disposals see the Capital Gains Manual
available on the HMRC website at http://www.hmrc.gov.uk).
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Offshore Funds Manual
OFM11150
Investors in non-reporting funds: deduction of offshore income
gains in computing capital gains: rollover relief (S162 TCGA) – Regulation 46
OFM10700 explains that any gains on interests in offshore funds which form part of
the assets on the transfer of a business and which would usually be subject to relief
under section 162 of TCGA 1992 (roll-over relief) cannot be subject to the relief, and
an offshore income gain is charged in respect of any ‘basic gain’ arising on those
interests at that time.
On such a transfer, the transferor will receive shares in the company transferee. If
the transferor subsequently disposes of part or all those shares, then section 162(4)
TCGA provides a formula that reduces the acquisition cost of those shares (the ‘new
assets’) disposed of (for further details see the Capital Gains Manual available on the
HMRC website at http://www.hmrc.gov.uk). It usually works as follows The proportion of aggregate net gains attributable to the consideration received in the
form of shares is deducted from the allowable acquisition costs of those shares (i.e.
the ‘new asset’), and the charge on those gains is thus deferred until the shares are
disposed of.
Section 162(4) gives instructions for computing the amount attributable to the
consideration in shares. It states that the fraction A/B has to be applied to the
aggregate net gains, where
`A' is the cost of the shares and
`B' is the value of the whole consideration received by the transferor in exchange for
the business.
But where the transfer gave rise to an offshore income gain (because the assets
transferred included interests in offshore funds), then “B” is to be taken to be what it
would be if the value of the consideration other than shares so received by the
transferor were reduced by an amount equal to the offshore income gain.
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Offshore Funds Manual
OFM11200
Investors in non-reporting funds: deduction of offshore income
gains in computing capital gains: consideration on a reorganisation (S128
TCGA) – Regulation 47
Where there is a disposal which gives rise to an offshore income gain and that
disposal arises as a result of —

regulation 35 (application of section 135 of TCGA 1992: exchange of
securities for those in another company – see OFM08700),

regulation 36 (application of section 136 of TCGA 1992: reconstruction or
amalgamation involving issue of securities – see OFM08750), or

regulation 37 (exchange of interests of different classes – see OFM08800).
then TCGA 1992 has effect as if an amount equal to the offshore income gain to
which that disposal gives rise were given (by the person making the exchange) as
consideration for the new holding (within the meaning of section 128 of TCGA
(consideration given or received for new holding on a reorganisation)).
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Offshore Funds Manual
OFM11500
Investors in non-reporting funds: conversion of a non-reporting
fund to a reporting fund: consequences for participants in non-reporting fund –
Regulation 48
When a UK investor disposes of an interest in a non-reporting fund, or in a reporting
fund which has not been a reporting fund for the entire period that the investor held
their interest, an offshore income gain may arise.
In the latter case, the fund may have been a reporting fund for the majority of the
time that the investor held their interest prior to disposal, but without any further
provision the whole of any basic gain arising would be charged to tax as an offshore
income gain.
Regulation 48 applies where an offshore fund ceases to be a non-reporting fund and
becomes a reporting fund. It provides an opportunity for a UK investor to make an
election for a deemed disposal of their interest at the point of conversion, and to be
treated as 
disposing of the interest in the non-reporting fund at its market value on the
disposal date, and

as acquiring a holding in the reporting fund at the beginning of the reporting
fund’s first period of account.
An offshore income gain is treated as arising on the deemed disposal and the
deemed acquisition is treated as made for the same amount as the deemed disposal.
An election may not be made unless the offshore income gain arising on the deemed
disposal is greater than zero, so a loss cannot be crystallized at this point.
Elections must be made by being included in a return made for the tax year which
includes the deemed disposal date, or if the investor is chargeable to corporation tax,
by being included in the company’s tax return for the accounting period which
includes the deemed disposal date. There is no special section on the return to
indicate that an election has been made – an offshore income gain should be
calculated and returned in the same way as it would on an actual disposal, and it is
recommended that an entry is made in the white space (for an income tax return) or
in the accompanying computations (for a corporation tax return).
If the interest in the offshore fund is held by an offshore trust and there is a possibility
that an offshore income gain could be charged on a UK resident settlor or beneficiary
then the settlor or beneficiary should make the election.
If no election is made, then any ‘excess income’ (regulation 94 - see OFM15600)
treated as additional distributions and taxed accordingly are allowable as acquisition
costs arising under section 38(1)(a) TCGA 1992 (regulation 99 – see OFM15750)
when an investor disposes of his or her interest in a fund.
Investment standing at a loss when fund becomes a reporting fund
In such a case (where an election is prevented by regulation 48(5)) the eventual
disposal of an interest in the reporting fund will not incur a charge to tax on an
offshore income gain.(regulation 17(3)(d)).
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- 126 -
Offshore Funds Manual
Reporting funds
Contents
OFM12000
OFM12500
OFM13000
OFM13500
OFM14000
OFM14500
OFM15000
OFM15500
OFM16000
OFM16500
OFM16750
OFM17000
Introduction
Application for reporting fund status
Duties of reporting funds
Preparation of accounts
Computation of reportable income
Transactions not treated as trading transactions
Reports to participants
Tax treatment of participants in reporting funds
Provision of information to HMRC
Breaches of reporting fund conditions
Constant NAV funds
Leaving the reporting fund regime: notice given by fund
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Offshore Funds Manual
OFM12000
Reporting funds: introduction: general
A ‘reporting fund’ is an offshore fund within the meaning of section 40A(2) FA 2008
that has applied for and been approved as a reporting fund, and that has not
voluntarily left the reporting fund regime (regulation 116) or been excluded by HMRC
(regulation 114).
There is a list of funds that come within the definition of an offshore fund and that
have successfully applied for reporting fund status on HMRC’s website. The list is
updated on a monthly basis and can be found at
http://www.hmrc.gov.uk/collective/reportingfundlist.pdf.
This part of the guidance sets out –






how a fund can enter the reporting funds regime;
what reporting funds must provide to HMRC and to their investors;
how reporting funds should compute their reportable income;
how breaches of the reporting fund conditions are dealt with;
what happens when a fund leaves the reporting funds regime; and
the tax treatment of participants in reporting funds.
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Offshore Funds Manual
Reporting funds
OFM12500
Application for reporting fund status
Contents
OFM12550
OFM12600
OFM12650
OFM12700
OFM12750
OFM12800
OFM12850
Who may apply
Conversion from a non-reporting fund
Contents of application
Form & timing of the application
HMRC responses to applications
Rejection of application - Appeals
Constant NAV funds – modification of application process
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Offshore Funds Manual
OFM12550
Reporting funds: application for reporting fund status: who can
apply – Regulation 51
Where the fund is an existing fund, the manager of the fund may make an application
on the fund’s behalf for it to be accepted as a reporting fund.
It is also possible for applications to be made on behalf of funds yet to be
established, and in those circumstances the application should be made by the
person who is expected to become the manager of the anticipated fund.
Reference to ‘the manager of the fund’ includes the manager or other person who
has or is expected to have day to day control of the property of the fund.
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Offshore Funds Manual
OFM12600
Reporting funds: application for reporting fund status:
conversion from a non-reporting fund – Regulation 52
The manager of a non-reporting fund may apply on the fund’s behalf for it to become
a reporting fund provided that either it has never been a reporting fund or, if it has
been, that it gave notice under regulation 116 (‘Termination by notice given by
reporting fund’) that it was leaving the regime.
The term ‘existing fund’ in regulation 52(2) takes its meaning from regulation 51(3)
rather than the meaning within para 3 of Schedule 1 to the regulations. The practical
difference is that if a fund did not have reporting fund status (or distributing fund
status under the transitional rules in para 3 of Schedule 1) for any period prior to
applying to be a reporting fund then an application would be made under regulation
52, rather than regulation 51.
Note that if a notice under regulation 116 was previously given but regulation 117
applied so as to treat the fund as having been excluded by HMRC under regulation
114 (because the fund had failed to comply with the requirements of the offshore
funds regulations) then the fund cannot reapply
It follows that a fund also cannot apply to be a reporting fund if it has previously been
excluded from being a reporting fund as a result of a notice given by HMRC under
regulation 114 (‘Consequences of serious breaches’).
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Offshore Funds Manual
OFM12650
Reporting funds: application for reporting fund status: contents
of application – Regulation 53
Applications must include all of the following –
a) a statement showing the first period of account for which it is intended the
fund should be a reporting fund;
b) an undertaking that the fund will not have any periods of account exceeding
18 months;
c) a statement of whether the fund intends to use International Accounting
Standards (IAS) in the preparation of its accounts or, where it does not, a
statement of which generally accepted accounting practice it intends to use;
d) where a fund does not intend to prepare its accounts in accordance with IAS,
a statement specifying where in the fund’s accounts the figure which it
considers to equate to ‘total comprehensive income for the period’ can be
found (see OFM14150 for an explanation of what is meant by ‘total
comprehensive income for the period’); and also
e) a statement specifying how the fund intends to comply with regulation
66(1)(b) (effective interest income or comparable amounts) and to calculate
the adjustment required by regulation 66(2) (see OFM14260);
f) an undertaking to meet the requirements relating to reports to participants in
the fund;
g) an undertaking to meet the requirements relating to the provision of
information to HMRC.
In addition, applications for existing funds must be accompanied by the fund
prospectus or, where the application is for an anticipated fund, the proposed
prospectus. Documents provided must either be in English or be accompanied by an
English translation. Where a fund provides both ‘short’ and ‘long’ prospectuses to
potential investors, regulatory requirements dictate that the short version must be
translated before the fund in question can market to UK investors, but the long
version is not usually translated. Provided that the short version contains all of the
relevant details that an investor would rely on before deciding whether to invest (so,
for example, the structure of the fund, its investment strategy, its tax status, etc.) then
HMRC would not also require a translation of the long version.
In respect of items (d) and (e) above, a ‘future fund’ applying under regulation 51(2)
may have established the GAAP it will use but not yet have identified what entries in
its accounts will equate to total comprehensive income, or how it will comply with
regulation 66 (effective interest income or comparable amounts). If that is the case,
an application may still be made but the person applying should explain the position
in the notes space of the application form (see below). HMRC are unable to approve
a fund as a reporting fund until all of the items required by regulation 53 have been
provided. Where the information for (d) and (e) is to be provided at a later date,
HMRC will write to request that information under regulation 55(1)(c) and agree the
time to be allowed for a response with the applicant, which must in any case be
before the commencement of the first period for which reporting fund status is
required. HMRC will state whether the application would be accepted in respect of
the other requirements of regulation 53.
Where the fund applying for reporting fund status is part of an umbrella arrangement
or constitutes a class of interest then the documents must relate to the entity which
includes the fund.
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Offshore Funds Manual
A pro-forma application form and checklist is available on HMRC’s website – see
OFM12700 for a link.
Once an application for a future fund has been approved by HMRC, there may be a
delay in the fund receiving subscriptions from investors. Where that remains the case
before the end of a fund’s first or subsequent accounting periods it is recommended
that the manager sends a ‘nil’ return to HMRC for each reporting period in order to
make clear that there has not been a breach under regulation 112 (‘cases where
information is not provided’).
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Offshore Funds Manual
OFM12700
Reporting funds: application for reporting fund status: form &
timing of the application – Regulation 54
All applications must be made in writing to HMRC, and should be addressed to –
HMRC
Collective Investment Schemes Centre
1st Floor South
Concept House
5 Young Street
Sheffield
S1 4LB
All applications must be in English, and supporting documents (if not in English) must
be accompanied by a translation into English (but see OFM12650 where ‘long’ and
‘short’ versions of prospectuses are issued to investors).
A pro-forma application form and checklist can be found on HMRC’s website at
http://www.hmrc.gov.uk/collective/cis-centre.htm. Whilst not mandatory, it is
recommended that these are used to ensure that applications are dealt with as
quickly and efficiently as possible.
All application forms must be received by HMRC before the expiry of a period of
three months beginning on the latest of –
 the first day of the first period of account for which the application is being
made for the fund to be treated as a reporting fund;
 the day on which any investor is first issued units or a similar interest in the
fund; or
 for a fund that was an offshore fund under the previous definition at S.756A
ICTA prior to 1 December 2009 (an ‘existing fund’ as defined in Schedule 1),
the first day on which interests in the fund are made available to UK resident
investors (for example, by way of advertisement to advisers or potential
investors in the case of a retail fund, or by invitation to subscribe made to a
qualified investor resident in the UK for private placement). Note that an
existing fund means a particular fund, so it could not apply to a new subfund
created after 1 December 2009 even if the umbrella fund existed at that date.
An application may be withdrawn (by the person entitled to make the application –
see OFM12550) at any time during a period –

beginning on the day the application is made and

ending on the expiry of a period of 28 days from the day on which HMRC
respond (under regulation 55(1) – see OFM12750).
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Offshore Funds Manual
OFM12750
Reporting funds: application for reporting fund status: HMRC
responses to applications – Regulation 55
HMRC must, within 28 days beginning with the day on which it receives the
application, give notice to the person who made the application –

accepting the application;

rejecting the application; or

asking for further information in order to consider the application.
HMRC will not accept an application if –

any of the items required together with an application (set out in regulation
53 – see OFM12650) is not supplied, or

it is considered that there will be a significant difference, in computing
reportable income (see OFM14000 onwards) between the result given by
the use of international accounting standards (‘IAS’), and the result given
by the use of the accounting practice specified in the application and by
the use of the entries in the fund’s accounts, specified in the application,
that are considered to equate to “total comprehensive income for the
period” as that expression is used in IAS (see regulation 63).
Where HMRC have asked for further information (under paragraph (1)(c) of
regulation 55), and the person who made the application provides it within a period of
28 days (beginning with the day on which HMRC asked for it, or within any longer
period it may have agreed) then HMRC will, within 28 days beginning with the day on
which they receive the further information, give notice to the person who made the
application either accepting or rejecting the application.
There is an appeal process if HMRC rejects an application – see OFM12800.
There is a list of offshore funds that have successfully applied for reporting fund
status on HMRC’s website. The list is updated on a monthly basis and can be found
at http://www.hmrc.gov.uk/collective/reportingfundlist.pdf.
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Offshore Funds Manual
OFM12800
Reporting funds: application for reporting fund status: rejection
of application - appeals – Regulation 56
If HMRC rejects an application, the person who made the application can appeal by
giving notice of appeal to HMRC within a period of 42 days beginning with the day on
which a notice rejecting the application was given.
Appeals will be heard by the First-tier Tribunal (or the Upper Tribunal if so
determined by Tribunal procedure rules) who may either uphold or quash the
rejection of the application. If the tribunal quashes the rejection of the application, the
fund will be treated as a reporting fund as if HMRC had accepted the application in
the form in which it was considered by the tribunal.
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Offshore Funds Manual
OFM12850
Reporting funds: application for reporting fund status: constant
NAV funds: modification of application process – Regulation 120
A “constant NAV fund” is an offshore fund whose net asset value (expressed in the
currency in which units are issued) does not fluctuate by more than an insignificant
amount throughout the fund’s existence, as a result of the nature of the fund’s assets,
and the frequency with which the fund distributes its income (regulation 118).
HMRC would expect that the stability of a constant NAV fund would be such that if
units were denominated at (say) €1 (1 Euro), the fund would at all times sell and
redeem at that price allowing only for any expenses of selling or redemption to make
any difference and that an investor, acting reasonably, would at all times, value a
holding of units at €1 for each unit.
The reporting fund rules are modified in a number of regards for constant NAV funds
– see OFM16750 for details.
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Offshore Funds Manual
Reporting Funds
OFM13000
Duties of reporting funds
Contents
OFM13050
OFM13100
OFM13150
Effect of entry into reporting fund regime
General duties of reporting funds
Constant NAV funds
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Offshore Funds Manual
OFM13050
Reporting funds: duties of reporting funds: effect of entry into
reporting fund regime – Regulation 57
Once HMRC has accepted an application, an offshore fund becomes a reporting fund
on whichever is the later of the first day of the first period of account for which it is
proposed the fund should be a reporting fund, or the day on which the fund is
established (the latter may be later where there is a delay in setting up an offshore
fund, and the application was made in respect of a prospective reporting fund).
Part 3 of the regulations (‘Reporting funds and the treatment of participants in
reporting funds’) applies to the fund and to its UK investors from the date that HMRC
accepts an application, and will continue to apply unless and until the fund provides a
valid notice that it wishes to leave the reporting fund regime (under regulation 116 –
see OFM17050) or it is excluded by HMRC (in accordance with regulation 114 – see
OFM16850).
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Offshore Funds Manual
OFM13100
58
Reporting funds: duties of reporting funds: general – Regulation
On being approved as an offshore fund, a fund has to meet certain obligations to
both its UK investors and HMRC to continue to be approved as a reporting fund for
each reporting period.
In particular, reporting funds are required to –




prepare accounts in accordance with the requirements of Chapter 4 of Part
Three of the regulations (see OFM13500 onwards);
provide a computation of their reported income in accordance with the
requirements of Chapter 5 of Part Three of the regulations (see OFM14000
onwards);
provide reports to participants in accordance with the requirements of Chapter
7 of Part Three of the regulations (see OFM15000 onwards); and
provide information to HMRC in accordance with the requirements of Chapter
9 of Part Three of the regulations (see OFM16000 onwards).
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Offshore Funds Manual
OFM13150
Reporting funds: duties of reporting funds: constant NAV funds –
Regulation 121
A “constant NAV fund” is an offshore fund whose net asset value (expressed in the
currency in which units are issued) does not fluctuate by more than an insignificant
amount throughout the fund’s existence, as a result of the nature of the fund’s assets,
and the frequency with which the fund distributes its income (regulation 118).
The reporting fund rules are modified in a number of regards for constant NAV funds
– see OFM16750 onwards for details.
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Offshore Funds Manual
Reporting Funds
OFM13500
Preparation of accounts
Contents
OFM13550
OFM13600
OFM13650
Acceptable accounting policy
Changes in accounting policy
Changes of accounting practice
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Offshore Funds Manual
OFM13550
Reporting funds: preparation of accounts: acceptable accounting
policy – Regulation 59
Reporting funds must prepare their accounts in accordance with international
accounting standards (IAS), or alternatively in accordance with the generally
accepted accounting practice (GAAP) specified in the fund’s application for reporting
fund status. Some GAAPs permit a degree of choice in applicable standards and
particular rules may apply to certain entity types such as OEICs, for example.
Therefore, although a particular GAAP may be acceptable, it remains the
responsibility of reporting funds to correctly calculate reportable income.
A list of GAAPs that have been accepted by HMRC on application for reporting fund
status is available on the HMRC website on pages maintained by the Collective
Investment Schemes Centre (‘CISC’) at http://www.hmrc.gov.uk/collective/ciscentre.htm. The pages includes notes detailing the entries in accounts prepared in
accordance with each GAAP that are considered to equate to total comprehensive
income (‘TCI’) for a period, and any adjustments that would be required. The notes
have been prepared based on applications received by HMRC and should not be
considered to be exhaustive, and reporting funds remain responsible for correctly
calculating TCI. CISC can provide assistance in cases of doubt or where GAAPs that
have yet to be approved are used – contact details are shown on their web pages.
- 143 -
Offshore Funds Manual
OFM13600
Reporting funds: preparation of accounts: change in accounting
policy – Regulation 60
Where a fund changes its accounting policy from one period of account to the next
one in accordance with the law and practice in relation to each of those periods, and
that change results in a change in the accounting value of an asset or a liability of the
fund, then a corresponding debit or credit (as appropriate) must be brought into
account for the later period.
Here, ‘accounting value’ means the carrying value of the asset or liability recognised
for accounting purposes.
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Offshore Funds Manual
OFM13650
Reporting funds: preparation of accounts: changes of
accounting practice – Regulation 61
Where a fund changes its accounting practice in drawing up a reporting fund’s
accounts from one period of account to the next period of account, and the accounts
for the later period are in accordance with a generally accepted accounting practice
(‘GAAP’), then –


if the accounts for the later period are prepared in accordance with
international accounting standards (‘IAS’), the offshore fund is only required to
give notice of that to HMRC; but
if the accounts for the later period are not prepared in accordance with IAS
then the fund must apply to HMRC for approval of that GAAP, unless the
GAAP in question has been approved by HMRC and included in a list on the
HMRC web pages maintained by the Collective Investment Schemes Centre
(‘CISC’) (see OFM13550 for further details). The application must be
accompanied by a statement specifying the entries in the fund’s accounts that
are considered to equate to “total comprehensive income for the period” as
that expression is used in IAS.
HMRC must give notice to the offshore fund either accepting or rejecting the
application within 28 days beginning with the day on which HMRC receive such an
application.
Appeals against HMRC rejection of application
If HMRC reject an application, the fund can appeal by giving notice of appeal to
HMRC within a period of 42 days beginning with the day on which the notice rejecting
the application was given.
Appeals will be heard by the First-tier Tribunal (or the Upper Tribunal if so
determined by Tribunal procedure rules) who may either uphold or quash the
rejection of the application.
Failure to apply for approval of GAAP not in accordance with IAS
Failure to make an application where required to do so by regulation 66 would be
considered to be a ‘serious’ breach and would result in the fund ceasing to be a
reporting fund (regulation 113(3) - see OFM16630).
- 145 -
Offshore Funds Manual
Reporting funds
OFM14000
Computation of reportable income
Contents
OFM14050
OFM14100
OFM14150
OFM14200
OFM14250
OFM14300
Introduction
Duty to provide a computation
Figures to be used in computation
Adjustments for capital items
Adjustments for special classes of income
Equalisation
- 146 -
Offshore Funds Manual
OFM14050
Reporting funds: computation of reportable income: introduction
Reporting funds must provide a report to their UK investors of the fund’s reportable
income, and the investor’s proportionate share of that income (see OFM15000
onwards). A report must also be made to HMRC (see OFM16000 onwards).
The reported income notified to each investor will be the investor’s proportionate
share of the fund’s income derived from its accounts (which must be computed in
accordance with international accounting standards (IAS), or alternatively in
accordance with an approved generally accepted accounting practice (GAAP) – see
OFM13500 onwards), with adjustments for certain items as required by the
regulations. The following pages provide further guidance on the duty to provide a
computation, the figures to be used and the required adjustments.
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Offshore Funds Manual
OFM14100
Reporting funds: computation of reportable income: duty to
provide a computation – Regulation 62
Reporting funds must provide a computation of their reportable income for each
period of account for which the offshore funds regulations apply.
- 148 -
Offshore Funds Manual
OFM14150
Reporting funds: computation of reportable income: figures to be
used in computation – Regulation 63
The starting point for calculating the reportable income of a reporting fund for a
period of account is, in the case of a fund using International Accounting Standards,
the ‘total comprehensive income for the period’ as expressed in IAS1, or alternatively
for a fund not using IAS, an equivalent amount.
An ‘equivalent amount’ means the amount specified in the fund’s application as ‘total
comprehensive income for the period’’ and agreed by HMRC as being equivalent.
For example, in the case of a fund using UK GAAP it will be the “Net
revenue/expense after taxation” of the fund (see paragraph 3.33 of the Investment
Management Association’s Statement of Recognised Practice (the IMA SORP).
Any adjustments to the starting point in reaching the figure for reportable income
should only be made once, regardless of whether such an adjustment could fall to be
made under more than one part of the Regulations, and where the result of the final
calculation is negative then reportable income is taken to be nil.
The adjustments to be made to the starting figure in order to reach the figure for
reportable income are explained in the following pages.
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Offshore Funds Manual
OFM14200
Reporting funds: computation of reportable income:
adjustments for capital items – Regulations 64 and 65
Reporting funds must identify capital items that would fall under the heading “Net
capital gains/losses” in accounts prepared using the Investment Management
Association’s Statement of Recognised Practice (the IMA SORP).
The figure used as the starting point must be adjusted for any gains or losses falling
within the heading by deducting gains and adding losses.
That figure must also be adjusted by adding:


any other expenses directly related to the acquisition or disposal of
investments; and
any costs relating to the setting up, merger or dissolution of the fund
Trading income
No trading income or profits may be deducted from the starting point in accordance
with this regulation, even in cases where the IMA SORP might classify such income
or profit as capital, except in cases where regulation 80 applies (see OFM14500
onwards).
- 150 -
Offshore Funds Manual
Reporting Funds
OFM14250
Adjustments for special classes of income
Contents
OFM14260
OFM14270
OFM14280
OFM14290
Effective interest income
From wholly-owned subsidiaries
From other reporting funds
From non-reporting funds
- 151 -
Offshore Funds Manual
OFM14260
Reporting funds: computation of reportable income: adjustments
for special classes of income: effective interest income – Regulation 66
If the accounting practice used does not include the effective interest method for
calculating interest income (as in IAS 39) then it must either use another method of
bringing interest income into account in such a way that the expected gain or loss in
value of an interest bearing asset over its life is taken into account as interest
(revenue) income or if that is not the case then an adjustment must be made to
increase the reportable income over the expected life of the asset by any expected
increase in value of the asset (and correspondingly to decrease reportable income by
any expected loss over the life of the asset).
The adjustment may be made by any reasonable method providing that it takes into
account the full expected gain or loss on the asset and is reasonably comparable to
the effective interest method.
This does not prevent it from being less complex than the effective interest method
(for example straight line amortisation would be acceptable) providing that it does not
consistently reduce the figure reached for reportable income when compared with the
effective interest method.
- 152 -
Offshore Funds Manual
OFM14270
Reporting funds: computation of reportable income: adjustments
for special classes of income: income from wholly-owned subsidiaries –
Regulation 67
A wholly owned subsidiary, for the purposes of the offshore funds regulations, means
a company where the whole of the issued share capital (subject to the paragraph
below) is directly and beneficially owned by a fund falling within the definition of an
offshore fund, or by the trustees of such a fund for the benefit of the fund, or where it
is owned in such a manner that it near as possible corresponds to either of those
categories.
If a company has only one class of issued share capital, then reference to ‘the whole
of the issued share capital’ means a reference to at least 95 per cent of the share
capital.
In any case where any of the conditions above apply, the consequences are that the
receipts, expenditure, assets and liabilities of the subsidiary are to be regarded as
arising to the fund itself (subject to apportionment where the funds interest in the
subsidiary company is less than 100% - regulation 67(4)).
The fund should then, in all other respects, ignore its interest in that company,
including any distributions or other payments made to it by the subsidiary.
Additionally, any adjustments to the treatment of capital items required by regulations
64 and 65 must be made to the amounts treated as arising to the fund.
If the accounts of the subsidiary are consolidated into those of the fund then no
adjustment should be needed in respect of this regulation as the consolidation will
have achieved the required result.
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Offshore Funds Manual
OFM14280
Reporting funds: Computation of reportable Income: adjustments
for special classes of income: income from other reporting funds – Regulation
68
Where a reporting fund (referred to as ‘RF1’, or Reporting Fund 1, in the regulations)
has an interest in another reporting fund (‘RF2’), the income arising to RF1 is the
amount reported to it by RF2 – i.e. RF1’s share of RF2’s reported income.
The amount (if any) by which RF1’s proportionate share of the reported income of
RF2 for a period of account (of RF2) exceeds any actual distributions made in
respect of that period should be added to the amount specified in regulation 63, after
that amount has been adjusted in respect of capital amounts under regulations 64
and 65 (regulation 68(2)).
This ‘excess amount’ should be added in the period of account for RF1 when the
relevant fund distribution date for RF2 occurs (regulation 68(3) and (4)).
In the event that RF2 fails to report in time then RF 1 must include an estimate in its
own reported income and then make any necessary correction in the first period it
receives the required information from RF2 (regulation 68(3) and (5)).
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Offshore Funds Manual
OFM14290
Reporting funds: computation of reportable income: adjustments
for special classes of income: income from non-reporting funds – Regulations
69 and 70
Non-reporting fund holdings with full information – regulation 69
A reporting fund (‘RF’) may have an interest in one or more non-reporting funds
(‘NRF’). Where that is the case and all of the conditions set out in regulation 69 apply
then RF may carry out its own calculation of the reportable income for NRF and take
this into account in calculating its own reportable income.
It is then able to treat its interest in NRF as an interest in a reporting fund for the
purposes of its own calculation of reportable income and regulation 68, applying to
interests of reporting funds in other reporting funds, will apply accordingly.
Income from other non-reporting funds – regulation 70
Where any of the conditions in regulation 69 are not met, then no adjustments may
be made. The effect of this will be that the starting figure which reflects total return
will remain unadjusted in respect of RF’s interest in NRF so that the full amount of
the total return (or fair value increase) will be reflected in reported income.
This also applies if the conditions in regulation 69 have been met in earlier periods
but are no longer met (regulation 71).
Where the fair value of RF’s interest in NRF decreases, so as to produce a loss, that
loss may be carried forward to later periods of account to set against fair value gains
that would, without the set-off of such losses, be taken into account in calculating
RF’s reportable income. This is subject to the condition that RF must have been a
reporting fund for all periods in which such losses are made. Losses may only be
used once, and they may not be set off to the extent that they have been used to
reduce income for the period of account in which they were incurred.
- 155 -
Offshore Funds Manual
OFM14300
Reporting funds: computation of reportable income: equalisation
– Regulation 72
When a participant redeems an interest in a fund the sum paid out to the exiting
participator may include an element in respect of that participant’s right to income
accrued since the previous distribution date.
Where this is the case then, providing that the fund operates equalisation
arrangements, as defined in paragraphs (1) to (3) of regulation 72, such amounts
may be deducted from the sum of reportable income available for the benefit of the
remaining participants.
- 156 -
Offshore Funds Manual
Reporting funds
OFM14500
Transactions not treated as trading
Contents
OFM14550
OFM14600
OFM14650
OFM14700
OFM14750
OFM14800
Introduction
Conditions
Clearances
Treatment of investment transactions
Investment transactions
Investment manager exemption (IME)
- 157 -
Offshore Funds Manual
OFM14550
Reporting funds: transactions not treated as trading:
introduction – Regulation 73
The Authorised Investment Funds (Tax) (Amendment) Regulations 2009 (SI
2009/2036) introduced rules that prevent defined financial transactions carried out by
diversely owned UK authorised investment funds (AIFs) from being characterised as
trading transactions for tax purposes. The rules give diversely owned AIFs certainty
that gains on the realisation of certain types of investments cannot be recharacterised as profits arising from a trade which would then be taxable as income.
The rules operate by reference to certain conditions that must be met and to
specified transactions contained within a ‘white list’ (in Part 2B of those regulations).
Chapter 6 of Part 3 of the Offshore Funds (Tax) Regulations 2009 introduce similar
rules for offshore funds. Specifically, regulations within that chapter provide certainty
that specified transactions will not be treated as trading transactions for reporting
funds that meet the ‘equivalence condition’ at regulation 74, and the genuine diversity
of ownership (‘GDO’) condition at regulation 75 in that chapter.
The type of offshore funds able to access the white list within the Offshore Funds
(Tax) Regulations 2009 is intended to replicate as closely as possible the type of
fund comprising UK AIFs meeting the GDO condition. It follows that the test does not
therefore rely on any particular fund ‘type’, but whether or not the conditions for
equivalence are met. Any fund meeting those conditions will be able to access the
white list and, equally, any fund unable or unwilling to meet those conditions will not
be able to do so.
The following pages provide further guidance on the conditions, and the white list
transactions.
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Offshore Funds Manual
OFM14600
Reporting funds: transactions not treated as trading: conditions
– Regulations 74 & 75
The equivalence condition (regulation 74)
The equivalence condition will be met if either the reporting fund is recognised by the
Financial Services Authority (‘FSA’) under one of sections 264, 270 or 272 of the
Financial Services and Markets Act 2000 (‘FSMA 2000’), or the fund is a UCITS
(‘Undertaking for Collective Investment in Transferable Securities’) fund.
The genuine diversity of ownership (‘GDO’) condition (regulation 75)
The GDO condition in the Offshore Fund Regulations is intended to prevent close
groups of investors from taking advantage of the ‘white list’ provisions as they are
only aimed at investors in widely pooled schemes, rather than those using closely
held arrangements that may in reality be for the benefit of a tightly restricted group,
for example a group of family members or a group of companies in common
ownership. The concept of the GDO was first introduced in 2008 for Property AIFs,
and the GDO rules in the Offshore Funds Regulations are similar to the condition
applying to UK AIFs in regulation 9A of The Authorised Investment Funds (Tax)
(Amendment) Regulations 2009 (SI 2009/2036) except that:



The GDO condition applies to UK AIFs at sub-fund level, whereas it applies to
reporting funds at share class level if a reporting fund is by reference to a class of
share;
UK AIFs have certain rules for feeder funds for Property AIFs that do not apply to
reporting funds;
There is no prescribed form of the documentation that must be produced by
reporting funds containing the statements and undertakings in Condition A
(regulation 75(2)) (in the regulations applying to UK AIFs those statements must
be made in the instrument constituting the fund and the prospectus).
Guidance on the GDO conditions for UK AIFs is available in the Company Taxation
Manual (‘CTM’) on the HMRC website and, subject to the modifications noted above,
will also apply for the purposes of the GDO condition at regulation 75 of the Offshore
Funds Regulations. Additionally, for the purposes of condition C in regulation
75(4)(a), ‘marketing’ in the context of alternative funds includes via local private
placement mechanisms.
In particular, it should be noted that the CTM guidance states that –
‘If there is no doubt that a fund has or is intended to have a wide range of
unconnected investors then it will clearly have no difficulty in meeting the GDO and
advance clearance will not be necessary.’
The following page deals with advance clearances, but the important point is that if a
fund can demonstrate that it is, as a matter of fact, widely held (and continues to be
so) then HMRC will accept that the GDO condition is met.
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Offshore Funds Manual
OFM14650
Reporting funds: transactions not treated as trading: clearances
– Regulations 77 to 79
The manager of a reporting fund, or of a non-reporting fund that makes an
application for reporting fund status under regulation 52, can apply for clearance that
the fund meets the equivalence and the genuine diversity of ownership (‘GDO’)
conditions. An application can also be made in respect of a prospective fund that
intends to obtain reporting fund status.
Clearance applications should not be made as a matter of routine – if there is no
doubt that a fund can demonstrate that it meets the GDO condition in regulation 75 or
that it is, as a matter of fact, widely held (and continues to be so) then HMRC will
accept that the GDO condition is met.
Applications
Applications must be in writing, accompanied by the documents specified in
regulation 75(2) (relating to statements and undertakings by the fund). Applications
should be clearly marked ‘Clearance Application – Equivalence & GDO Conditions’
and sent to –
HMRC Collective Investment Schemes Centre
1st floor
Concept House
5 Young Street
Sheffield
S1 4LB
A pro forma application form that applicants may wish to use is available on the
HMRC website under the Collective Investment Schemes Centre (‘CISC’) pages.
HMRC response to applications
HMRC will notify the applicant within 28 days from when they receive the application
and documents (or, if they request further information, within 28 days of receiving
such further information) giving the clearance (which may be subject to conditions),
or refusing clearance. HMRC will explain the reasons for any refusal, and such a
refusal will not prevent a further application but clearly it would be expected that the
reasons for the refusal would be addressed before a further application was made.
Reliance on clearances
A reporting fund may only rely on a clearance in relation to any period of account if
the instrument constituting the fund or its prospectus includes a statement that is in
accordance with the relevant statements in the documents provided to HMRC with
the fund’s application (in accordance with regulation 75(2)) and the fund does not act
in any way that is in contravention of any such statement. The fund must also
continue to meet the GDO condition.
If the fund materially amends any of the documents sent with its original application
then it must make a new application if it wishes to rely on the clearance.
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Offshore Funds Manual
OFM14700
Reporting funds: transactions not treated as trading: treatment
of investment transactions – Regulation 80
If a reporting fund that is a ‘diversely owned fund’, (i.e. one that meets the conditions
in regulations 74 and 75 (see OFM14600)) carries out an investment transaction as
defined within regulation 81 (meaning of “investment transaction”) then the
transaction in question will not be treated as a trading transaction. Specifically, this
means that for the purposes of computing the reporting fund’s reportable income in
accordance with Chapter 5 of the Offshore Funds Regulations the transaction in
question will be treated as an investment transaction and cannot be re-characterised
as a trading transaction but see the paragraph below under the heading ‘Capital and
revenue’.
Where the conditions are met, all capital profits, gains or losses arising from
“investment transactions” are treated as non-trading. Capital profits, gains and losses
for this purpose are any profits, gains or losses treated as capital for accounting
purposes under the IMA Statement of Recommended Practice (SORP).
Capital and revenue
Regulation 80 treats gains and losses from “investment transactions” (as defined in
regulations 81 to 89 – see OFM14750) as being either Capital or Revenue as
characterised by the SORP. The result is that amounts so characterised as capital
may be adjusted in accordance with regulations 64 or 65 but revenue profits (as
characterised in the SORP) from “investment transactions” remain included in the
computation of reportable income. For example, interest calculated under the
effective yield method (or some similar method calculated under regulation 66) must
be included within the computation of reportable income even where regulation 80
applies to prevent any capital profit on disposal of the instrument being characterised
as trading income.
Reporting funds and trading
Where regulation 80 does not apply, it remains a question of fact whether or not
activities carried out by a reporting fund amount to trading for tax purposes.
In such cases, the normal principles for determining whether or not there is a trade
will apply and there is no automatic assumption that transactions which are not
“investment transactions” for the purposes of regulation 80 will be trading
transactions by default. Where a reporting fund carries out financial transactions and
regulation 80 does not apply, the principles set out in the guidance in the Business
Income Manual (‘BIM’), available on the HMRC website, should be considered.
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Offshore Funds Manual
OFM14750
Reporting funds: transactions not treated as trading: investment
transactions – Regulations 81 to 89
Regulations 81 to 89 specify the types of transaction that are an “investment
transaction” for the purposes of regulation 80. The regulations provide that an
“investment transaction” is any transaction:







in stocks or shares;
in a “relevant contract”;
which results in the diversely owned fund becoming party to a “loan relationship”
or “related transaction”;
in units in a collective investment scheme;
in securities (not included in the above categories);
consisting in the buying or selling of foreign currency; or
in a carbon emissions trading product.
The categories above are the same categories that apply to UK AIFs, in regulation
14F of SI2009/2036. The meaning of the above terms is explained in guidance
published in the Company Taxation Manual (‘CTM’) on the HMRC website and that
guidance also applies for the purposes of regulations 81 to 89 of the Offshore Funds
Regulations.
Any transaction that is not specified in regulations 81 to 89 will not be an “investment
transaction” for the purposes of regulation 80. This does not mean, however, that the
transaction will be a trading transaction by default. Such a transaction may still be
non-trading on first principles (see OFM14700).
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Offshore Funds Manual
OFM14800
Reporting funds: transactions not treated as trading: Investment
Manager Exemption (IME)
Regulation 80(2) of the regulations, which confirms that certain transactions are
treated as non-trading transactions, applies only for the purposes of Chapter 5 of the
regulations; that is for the purposes of computing an offshore fund's reportable
income in order to establish the UK tax position of participants in the fund.
The regulations are made under powers enabling provision to be made about the tax
treatment of participants in an offshore fund (section 41 FA 2008) and they should be
read in that context. Specifically, the regulations do not make or purport to make
rules that affect the taxation of any of the funds referred to therein as 'offshore funds';
only to regulate the taxation of the returns from those funds to persons taxable under
UK legislation. Funds that are taxable in the UK are dealt with by other legislation.
It is a question of fact whether or not, for the purposes of that other legislation, a nonresident fund is carrying on a trade in the UK. Where such a fund is carrying on a
trade in the UK through an investment manager operating here, the protection of the
Investment Manager Exemption may be available in relation to any 'investment
transaction' specified in the Investment Manager (Specified Transaction) Regulations
2009.
Guidance on the Investment manager Exemption can be found in the International
Manual on the HMRC website.
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Offshore Funds Manual
Reporting funds
OFM15000
Reports to participants
Contents
OFM15050
OFM15100
OFM15150
General
Contents of report
Long accounting periods: incomplete information
- 164 -
Offshore Funds Manual
OFM15050
Reporting funds: reports to participants: general
Reporting funds are required to make available a report to each of their participants
who hold an interest in the fund at the end of the reporting period in question for each
reporting period (regulation 90(1)). This is to enable UK participants to make a return
of their proportionate share of the reportable income (the ‘reported income’ for each
investor). It can also be used by participants that are themselves reporting funds in
computing their own reportable income.
Note that the obligation is to the participants (investors) rather than to nominees. A
reporting fund can make a report available on a website where this may present
difficulties – see below.
A ‘reporting period’ is (regulation 91) –

in the case of a reporting fund with a period of account of 12 months or less,
the period of account ;

where the period of account is greater than 12 months, there will be two
reporting periods: the first being the first 12 months of the period of account,
and the second being the remainder of the period. (The period of account of a
reporting fund cannot be longer than eighteen months – regulation 53(1)(b)).
The report must be made available to the participants within six months of the day
immediately following the final day of the reporting period in question (regulation
90(5)), so for example a fund with a reporting period of, say, 1 January 2010 to 31
December 2010 must make the report available to its participants by no later than 1
July 2011. The report must be in English (regulation 90(6)).
A report can be ‘made available’ in a number of different ways –

it can be sent to UK investors by post,

it can be sent to UK investors by means of an electronic communications
service (for example, as a PDF document attached to an email),

it can be made available on a website accessible to UK investors and to
HMRC, or

it can be published in a newspaper which is published in English, in the
United Kingdom, and is readily available in all parts of the United
Kingdom.
If reports are not sent by post then the method of providing them to investors must be
agreed with them. ‘Agreement’ in this sense would be satisfied, for example, by –


a ‘tickbox’ on the application form;
sending communications to investors or updating fund documentation from
time-to-time, with a set time for comments (including via nominees).
The report does not have to be personalised for the investor – see OFM15100 for the
required contents of a report.
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Offshore Funds Manual
OFM15100
Reporting funds: reports to participants: contents of report –
Regulation 92
The report sent or made available to investors of a reporting fund for each reporting
period must include all of the following –
1. the amount actually distributed to participants (i.e. all investors, which will
include UK investors) per unit of interest in the fund in respect of the
reporting period;
2. the excess of the amount of the reported income per unit of interest in the
fund for the reporting period over the amount actually distributed to
participants per unit of interest;
3. the dates on which distributions were made;
4. the fund distribution date (per regulation 94(4) – see OFM15600);
5. a statement of whether or not the fund remains a reporting fund at the
date the fund makes the report available.
The ‘reported income’ of a reporting fund for a reporting period means the reportable
income of the fund for the reporting period, computed by or on behalf of the fund, and
provided in the report for the reporting period to the participants in the fund.
The reported income per unit of a reporting fund for a report is computed by dividing
the reported income of the fund for the reporting period by the number of units in the
fund in issue at the end of the reporting period,
An amount actually distributed to participants per unit of interest in the fund in respect
of the reporting period must be computed at the time the distribution is made.
An amount per unit of interest in the fund must be expressed to at least four decimal
places of a pound (or other currency unit) of value per unit.
If the amount of the reported income per unit of interest in the fund for the reporting
period is equal to, or less than, the amount actually distributed to participants per unit
of interest in the fund in respect of the reporting period, the amount to be stated in
respect of (2) above is nil.
See OFM15150 where a fund has long accounting periods and there is incomplete
information available when preparing a report (regulation 93).
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Offshore Funds Manual
OFM15150
Reporting funds: reports to participants: long accounting periods
- incomplete information – Regulation 93
Where a reporting fund has a period of account exceeding 12 months and it cannot
compute its reportable income for the first 12 months (the ‘relevant reporting period’)
of that period of account (as required by regulation 92), then the fund may either
calculate its reportable income based on the information reasonably available to it; or
apportion the income of that period of account to the two reporting periods by time (or
by some other method if this can be shown to give a more ‘just and reasonable’
result).
In either case, the reported income for the second reporting period within the period
of account must include all amounts not accounted for in the relevant reporting period
referred to above.
- 167 -
Offshore Funds Manual
Reporting funds
OFM15500
Tax treatment of participants in reporting funds
Contents
OFM15550
Introduction
OFM15600
General provisions
OFM15650
Participants chargeable to income tax
OFM15700
Participants chargeable to corporation tax
OFM15750
Disposals of interests
OFM15800
Deemed disposal election
OFM15850
Charitable companies & charitable trusts
OFM15900
Anti-avoidance provisions
OFM15950 Remittance Basis
- 168 -
Offshore Funds Manual
OFM15550 Reporting funds: tax treatment of participants in reporting funds:
introduction
The purpose of the offshore funds regulations is to prevent the roll-up of income in
offshore funds with any subsequent realisation of the investment being returned to
the investor in the form of capital. As with the previous ‘distributing fund’ rules, the
regulations provide that where there is roll-up of income any subsequent realisation
will be charged to tax as income, rather than to tax on capital gains.
The previous tax rules required the income of a fund to be distributed to UK investors
in order for those investors to be charged to tax on capital gains rather than on
income on disposal of their interest in the fund. The new reporting funds rules, by
contrast, require only that fund income is reported (although it may be distributed in
whole or in part as well).
There are specific rules within the regulations to ensure that any sums reported to
UK investors are charged to tax as income. The following pages provide more
detailed information, but the principle here is that there should not be anything to
prevent UK investors accumulating income within an offshore fund providing that the
income is taxed as it arises (as happens for investors in UK based funds).
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OFM15600
Reporting funds: tax treatment of participants in reporting funds:
general provisions – Regulation 94
A reporting fund is required to make a report to its participants for each reporting
period (whilst this is principally for UK investors for the purposes of the regulations,
other participants such as other offshore funds with an interest in a reporting fund
may also need a report). Regulation 92 sets out what each report must contain (see
OFM15100), which includes details of sums actually distributed to participants as well
as sums reported to them that represent the excess of the reported income of the
fund over the sums actually distributed.
Sums actually distributed will be subject to a charge to tax in accordance with the
normal provisions within the Tax Acts relating to the type of income in question (for
example, a corporate fund would distribute income in the form of foreign dividends
and in the hands of UK investors they would be subject to the normal rules relating to
such income; the Savings and Investment Manual (SAIM) on the HMRC website
contains detailed guidance on the treatment of UK investors with foreign income
generally and the following pages of this manual provide more details specifically
related to investments in offshore funds).
Where the whole of the reportable income of a fund is not distributed then the
excess is treated in the following ways –
Reporting fund which is a non-transparent fund
Where the fund is non-transparent for income purposes (such as would be the case
for an open-ended investment company, or ‘OEIC’ for example – the International
Manual (‘INTM’) on the HMRC website contains details of whether particular entity
types are transparent or opaque for income purposes) then the Tax Acts have effect
as if the excess of the reported income over the distributions made by the fund in
respect of the reporting period were additional distributions made to the participants
in the fund in proportion to their rights (regulation 94(1)). Where an investor holds
some interests that are grandfathered (as a result of regulation 30) and some that are
not, the excess specified in regulation 94 is reduced proportionately.
The tax treatment of the excess for UK investors will depend on whether they are
within the charge to income tax or corporation tax and the form of the nontransparent fund – see the following pages for further details.
Reporting fund which is a transparent fund
In the case of a reporting fund which is a transparent fund, such as would be the
case for certain unit trusts, for example, the Tax Acts have effect as if the excess of
the reported income over the distributions made by the fund in respect of the
reporting period were additional income of the participants in the fund in proportion to
their rights (regulation 94(2)). The tax treatment of UK investors of the excess will
depend on whether they are within the charge to income tax or corporation tax – see
the following pages for further details. Where an investor holds some interests that
are grandfathered (as a result of regulation 30) and some that are not, the excess
specified in regulation 94 is reduced proportionately.
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Date treated as made
The ‘excess’ in both cases is treated as made on the fund distribution date to
participants holding an interest in the fund at the end of the reporting period. The
“fund distribution date” for a reporting period of a reporting fund is —

in a case where the reporting fund issues its report to participants within a
period of six months beginning with the day immediately following the last day
of the reporting period, the date on which the report is issued, and

in any other case, the last day of the reporting period.
In the event of a report being issued to investors more than six months after the day
immediately following the last day of the reporting period, it is possible that UK
taxpayers may have already filed tax returns in the absence of details of the excess
of reported income. In such circumstances, taxpayers should already have included
details of their best estimate of the excess, and they may need to file amended
returns when the details are finally received.
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Reporting funds: tax treatment of participants in reporting funds
OFM15650
Participants chargeable to income tax
Contents
OFM15660
OFM15670
OFM15680
Corporate funds
Other non-transparent funds
Transparent funds
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OFM15660
Reporting funds: tax treatment of participants in reporting funds:
participants chargeable to income tax: corporate funds – Regulation 95
Where a reporting fund takes corporate form, any sums distributed together with any
excess of reported income will be treated as foreign dividends (unless the fund is a
‘bond fund’ – see below). Until 22 April 2009, dividends received from offshore funds
did not carry any entitlement to a dividend tax credit but from that date they will do so
unless the distribution is from a bond fund (section 378A ITTOIA 2005). Any sums
treated as an excess of reported income also carry an entitlement to a foreign tax
credit, unless the fund is a bond fund (regulation 95(4)).
Bond funds
From 22 April 2009 there is a change to the way dividends from offshore funds which
are substantially invested in interest-bearing assets (commonly known as ‘bond
funds’) are treated for tax purposes. Where an offshore fund holds more than 60% of
assets in interest-bearing (or economically similar) form, any distribution or excess of
reported income is treated as a payment of yearly interest (section 378A ITTOIA
2005 / regulation 95(3)). Such sums do not qualify for a dividend tax credit and the
tax rates that apply are those applying to interest. Fund managers should be able to
tell UK investors if a fund is a bond fund.
Remittance basis users
Where individuals not domiciled in the United Kingdom are taxed on the remittance
basis then the normal remittance basis rules will apply to income arising from the
reporting fund.
In the case of income that is reported but is not distributed then that income has not
been remitted to the UK.
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OFM15670
Reporting funds: tax treatment of participants in reporting funds:
participants chargeable to income tax: other non-transparent funds –
Regulation 96
Arrangements that are non-transparent for income purposes and that come within the
definition of an offshore fund under section 40A(2)(b) FA 2008 (that is, funds that do
not take corporate form) will be foreign unit trusts. Foreign unit trusts that are not
transparent for income purposes are sometimes referred to as ‘Garland’ unit trusts
(following the case of Garland v Archer-Shee (15TC693)).
Non-transparent unit trusts
UK investors in foreign unit trusts that are non-transparent for income purposes are
taxable on their proportionate share of income (as ascertained after the trustees have
met the expenses of administering the trust) when it is indefeasibly allocated to them,
regardless of whether the income is paid to them or accumulated. Unlike the position
for transparent unit trusts, that income is taxable as miscellaneous foreign income
(under Chapter 8 of Part 5 of ITTOIA 2005) and the tax rates applying will be those
applying to such income.
If there is an excess of reported income over the amount allocated (for example if the
unit trust has invested in another reporting fund and has itself received reports of
income which was not actually distributed to it) then the excess must be treated by
the participant in the same way as the allocated income (that is as miscellaneous
foreign income (under Chapter 8 of Pat 5 of ITTOIA 2005).
Remittance basis users
Where individuals not domiciled in the United Kingdom are taxed on the remittance
basis then the normal remittance basis rules will apply to income arising from the
reporting fund.
In the case of income that is reported but is not distributed then that income has not
been remitted to the UK.
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OFM15680
Reporting funds: tax treatment of participants in reporting
funds: participants chargeable to income tax: transparent funds – Regulation 97
Limited partnerships, which are transparent for income and capital gains tax
purposes, are outside of the offshore funds definition at section 40A(2)(c) FA 2008 as
investors are subject to tax on income and gains as they arise.
Other types of arrangements that are transparent for income purposes but not
transparent for capital gains purposes (Section 99 and 103A TCGA – see OFM03500
onwards) such as, for example, so called ‘Baker’ unit trusts (following the case of
Archer-Shee v. Baker, 11TC749) or certain foreign contractual arrangements (such
as Fonds Commun de Placement (‘FCPs’)) fall within the definition of an offshore
fund.
Income: UK tax treatment of investors
No matter what the legal form of a transparent reporting fund, for UK tax purposes
the income of an income transparent fund is treated as arising directly to its investors
(UK investors are charged to tax on income arising net of a deduction for proper
expenses of the management of the fund in question, and this is the case for both
unit trusts and contractual arrangements). So, for example, if a fund receives interest
income then UK investors are charged to tax on their proportionate share of that
income as it arises, irrespective of whether or not it is actually distributed to them.
Investors should receive a voucher from the fund to tell them what proportion of the
fund’s income they are entitled to, and the split between interest, dividends, property
income, etc. Investors should ask their fund manager for a voucher if they do not
receive one.
If a transparent reporting fund holds investments in other reporting funds then
investors are also taxable on their proportionate share of any income reported but not
actually distributed by the underlying fund (regulation 94(2)). This will become part of
the excess to be reported by the transparent reporting fund. Such excess reported
income is charged to tax as miscellaneous foreign income under Chapter 8 of Part 5
ITTOIA 2005 (regulation 97(4)), and it is chargeable at investors’ highest tax rate.
Remittance basis users
In a case where the reporting fund is transparent for UK tax purposes then the
income will arise from the underlying assets and not from the fund. In such a case
the income may sometimes arise in the UK (even though the fund itself is domiciled
offshore). Where the income arises in the UK the remittance basis does not apply.
Where the income arises offshore then the remittance rules will apply.
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OFM15700
Reporting funds: tax treatment of participants in reporting
funds: participants chargeable to corporation tax – Regulation 98
Corporate investors in offshore funds will be chargeable to corporation tax on any
distributions received from reporting funds under general principles, and on any
excess of reported income of the fund invested in under regulation 94(1) and (2).
Where such investors are taxable under regulation 94(1) on excess reported income,
that amount will be treated as exempt if it would be exempt had it been an actual
distribution.
The bond fund rules in Chapter 3 of Part 6 CTA 2009 (relationships treated as loan
relationships) may apply if a reporting fund held more that 60% by value of its
investments in debt type assets at any time during an investing company’s
accounting period – see the Corporate Finance Manual (‘CFM’)).
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OFM15750
Reporting funds: tax treatment of participants in reporting funds:
disposals of interests – Regulation 99
Pages at OFM08500 to OFM10500 provide guidance on when a disposal of an
interest in an offshore fund will give rise to an offshore income gain (‘OIG’). In all
other cases, the disposal of a UK investor’s interest in an offshore fund will be treated
as a disposal of an asset for the purposes of tax on chargeable gains.
UK investors will have been charged to tax under regulations 94 to 98 on income
distributed by a reporting fund, and on any excess of reported income arising under
regulation 94. Therefore, in order to avoid a double charge to tax, any sums specified
under regulation 94 are treated as expenditure given for the acquisition of the asset,
and allowable as acquisition costs arising under section 38(1)(a) TCGA 1992. See
OFM15760 for examples of how this works.
Regulation 101 provides an exception to that rule for charitable companies and
charitable trusts, as charitable bodies are exempt from a charge to tax on any
reported income. If a charitable body subsequently realised a capital gain on which it
would not be exempt because the gain was not applied for charitable purposes then
it would not be entitled to deduct amounts reported under section 94(1) as it would
not have been charged to tax on such sums.
Sums treated as expenditure in this way are treated as incurred on the fund
distribution date for the reporting period in respect of which the amount is treated as
distributed. See OFM15600 for the date taken as the fund distribution date.
Where a participant receives an amount in respect of an interest in a reporting fund
which is chargeable to tax as income but that amount is received (or treated as
received) after the date of the disposal of the interest the amount is treated as
received immediately before the disposal for the purposes of regulation 99.
Remittance basis users
The proceeds of a disposal of a reporting fund will normally constitute a ‘mixed fund’
for the purposes of the remittance basis rules. This is because the proceeds may
have been funded by undistributed (and therefore unremitted) reported income as
well as by the original investment and any capital growth.
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OFM15760
Reporting funds: tax treatment of participants in reporting funds:
disposals of interests – example
Example
The following example uses a fairly simple scenario to illustrate how an investor
might determine base cost for chargeable gains purposes. It uses an example fund
that does not operate equalisation.
Liz is a UK resident. She purchases 10,000 units in X Equity Fund, a Guernsey openended investment company, on 1 May 2010 for £2.50 per unit. She disposes of all of
the units on 31 December 2016 for £4.50 per unit.
The fund’s aim is to provide a mix of income and capital growth. It has a policy of
distributing 25% of its income to investors and accumulating the rest. The fund
prepares its accounts to 31 December each year, and makes distributions on 31
March. It sends a report to each of its investors electronically on 1 May each year
(containing the information required by regulation 92 – including details of actual
distributions and the ‘excess’ of reported income per unit over the sums actually
distributed). The fund is not a bond fund.
Liz received the following distributions and reports of excess of reported income –
Period
ending
31/12/2010
31/12/2011
31/12/2012
31/12/2013
31/12/2014
31/12/2015
31/12/2016
Sum
distributed
Date
distributed
Returned
in Tax Year
Sum
accumulated
Date
reported
Returned
in Tax Year
210
320
360
420
440
610
660
31/03/2011
31/03/2012
31/03/2013
31/03/2014
31/03/2015
31/03/2016
31/03/2017
2010/11
2011/12
2012/13
2013/14
2014/15
2015/16
2016/17
630
960
1,080
1,260
1,320
1,830
1,980
01/05/2011
01/05/2012
01/05/2013
01/05/2014
01/05/2015
01/05/2016
01/05/2017
2011/12
2012/13
2013/14
2014/15
2015/16
2016/17
2017/18
Liz receives a total of £45,000 on the sale of her units. She has been charged to
income tax on all sums distributed to her, and she has also been charged to income
tax on the ‘excess’ income accumulated within the fund and reported to her each
year, as shown above (regulation 95(4) provides that the excess income specified by
regulation 94(1) is charged to tax under S.397A ITTOIA 2005, as would the sums
actually distributed to her in accordance with normal principles).
The sums actually distributed to Liz are ignored for the purposes of calculating her
base cost for chargeable gains tax. The value of the accumulated sums, however, is
reflected in the price that Liz receives on the sale of her units. As Liz has already
been charged to tax on those sums, and in order to avoid a potential double charge
to tax, the total of the accumulated income (£9,060 – the total from the column
headed ‘sum accumulated’ above) is, in addition to the sum Liz paid for the units on
acquisition, treated as falling within S.38(1)(a) TCGA 1992 (acquisition and disposal
costs).
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Liz’s total base cost is therefore –
Acquisition cost of units
Total accumulated
income
Total
£
25000
9060
34060
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OFM15800
Reporting funds: tax treatment of participants in reporting
funds: deemed disposal election – Regulation 100
When a UK investor disposes of an interest in an offshore fund, an offshore income
gain (‘OIG’) will arise unless the fund has been a reporting fund throughout the period
that the interest was held (see OFM15750), subject only to any transitional provisions
that may apply (see OFM17500 onwards).
This would mean that, without any further provision, an investor might hold an
interest in a particular fund for many years only for that fund not to qualify for
reporting fund status for a particular period, or periods, just before the investor
wished to dispose of the holding with the result that the disposal would then give rise
to an OIG. Regulation 100 therefore applies in the case of an offshore fund which
ceases to be a reporting fund and becomes a non-reporting fund. It provides that an
investor in the fund may make an election to be treated for the purposes of TCGA
1992 as –

disposing of an interest in the reporting fund at the end of the fund’s final
period of account as a reporting fund, and

acquiring an interest in the (now) non-reporting fund at the beginning of
the fund’s first period of account.
By making such a deemed disposal election, the investor will be treated as making a
disposal of their interest in a reporting fund and acquiring an interest in a nonreporting fund. Any gain or loss arising on the deemed disposal will be subject to the
normal rules applying to chargeable gains tax (CGT) or corporation tax on
chargeable gains (see the Capital Gains Manual on the HMRC website at
www.hmrc.gov.uk). Any subsequent disposal of the interest in the now non-reporting
fund will be subject to an OIG on any further gains accrued from the deemed
disposal date.
An election can only be made if a report has been made available to the investor
under regulation 90 for the reporting fund’s final period of account.
If such an election is made then the deemed disposal is treated as being made for a
consideration equal to the net asset value of the investor’s interest in the fund at the
end of the last period of account for which the fund was a reporting fund. The
acquisition in the now non-reporting fund is treated as made for the same amount.
Form of election
Investors within the charge to income tax must make an election in a return made for
the tax year which includes the deemed disposal date. For investors within the
charge to corporation tax, an election must be included in the company’s tax return
for the accounting period which includes the deemed disposal date.
If the interest in the offshore fund is held by an offshore trust and there is a possibility
that an offshore income gain could be charged on a UK resident settlor or beneficiary
then the settlor or beneficiary should make the election.
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OFM15900
Reporting funds: tax treatment of participants in reporting
funds: anti-avoidance provisions – Regulations 102 to 105
There are provisions within regulations 102 to 105 that relate specifically to financial
traders if they hold interests in reporting funds that satisfy the conditions in regulation
73 (the equivalence and genuine diversity of ownership conditions).
These are anti-avoidance provisions to ensure that financial traders cannot avoid a
charge to tax on certain transactions dealt with under regulations 80 to 89, on which
they would otherwise be chargeable, by holding them through a fund that satisfied
the conditions in regulation 73.
The term ‘financial trader’ is defined in regulation 105 and can in certain
circumstances include connected persons - that regulation should be referred to for
full details, but broadly a financial trader will be one of the following –



a banking business;
an insurance business (excluding life assurance business – regulation
105(2)); or
a business dealing in trading assets so that profits arising from the holding
of investments in a reporting fund would form part of the trading profits of
the business.
Amounts brought into account (regulation 103)
The sums to be brought into account by financial traders with interests in reporting
funds satisfying the conditions in regulation 73 are all distributions received or treated
as received for a ‘relevant period’: that is, a period of account (for income tax payers)
or accounting period (for corporation tax payers), plus any further sums to be brought
into account in respect of the movement in value of the interest(s) as follows A) where the interest is held throughout the relevant period, the difference
between the market values of the interest from the beginning of that period to
the end of that period;
B) where the interest is acquired during the relevant period and is held
throughout the remainder of the relevant period, the difference between the
market value of the interest at the end of the relevant period and the
acquisition cost of the interest;
C) where the interest is held at the beginning of the relevant period and disposed
of during the period, the difference between the disposal value of the interest
and the market value of the interest at the end of the period immediately
preceding the relevant period; or
D) where the interest is acquired and disposed of during the relevant period, the
difference between the disposal value of the interest and its acquisition cost.
Exceptions (regulation 104)
The treatment that applies under regulation 103 explained above does not apply if
either –

the interest in the reporting fund forms part of the financial trader’s stock in
trade and all the profits and losses, including distributions, arising in respect
of the interest are included in the computation of the financial trader’s trading
profits for the relevant period, and that interest is accounted for under
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
generally accepted accounting practice on the basis of fair value accounting,
or
the interest is a relevant holding in respect of which the provisions of section
490 of CTA 2009 (holdings in OEICs, unit trusts and offshore funds treated
as creditor relationship rights) apply in relation to the financial trader (see
OFM10040).
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OFM15950
Reporting funds: tax treatment of participants in reporting
funds: remittance basis
Where individuals not domiciled in the United Kingdom are taxed on the remittance
basis then the normal remittance basis rules will apply to income arising from the
reporting fund.
In the case of income that is reported but is not distributed then that income has not
been remitted to the UK.
Transparent Funds
In a case where the reporting fund is transparent for UK tax purposes then the
income will arise from the underlying assets and not from the fund. In such a case
the income may sometimes arise in the UK (even though the fund itself is domiciled
offshore). Where the income arises in the UK the remittance basis does not apply.
Where the income arises offshore then the remittance rules will apply.
Disposals
The proceeds of a disposal of a reporting fund will normally constitute a ‘mixed fund’
for the purposes of the remittance basis rules. This is because the proceeds may
have been funded by undistributed reported income as well as by the original
investment and any capital growth.
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Reporting funds
OFM16000
Provision of information to HMRC
Contents
OFM16050
OFM16100
Annual reporting requirements
Obligation to provide information
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OFM16050
Reporting funds: provision of information to HMRC: reporting
requirements – Regulation 106
OFM13100 provides an overview of the duties that offshore funds have once they
have been approved as a reporting fund. One of those duties is that a reporting fund
must provide the following to HMRC within six months of the end of each period of
account –
(a) its audited accounts (see OFM13500 onwards);
(b) its computation of its reportable income for the period of account based on its
audited accounts (see OFM14000 onwards);
(c) a copy of the report made available to UK investors for each reporting period
falling within the period of account (including, for each reporting period, the
information specified in regulation 92(1) – see OFM15100);
(d) the reported income of the fund for each reporting period falling within the
period of account;
(e) the amount actually distributed to participants in respect of each reporting
period falling within the period of account;
(f) the number of units in the fund in issue at the end of each reporting period
falling within the period of account;
(g) the amount of the reported income per unit of interest in the fund in respect of
each reporting period falling within the period of account;
(h) a declaration confirming that the fund has complied with the obligations
specified in regulations 53 (contents of an application – see OFM12650) and
58 (general duties of reporting funds – see OFM13100).
The above information should be sent to –
HMRC
Collective Investment Schemes Centre (CISC)
1st Floor South
Concept House
5 Young Street
Sheffield
S1 4LB
(See OFM01000 for a list of contacts at CISC if you need to speak to someone
regarding provision of information to HMRC.)
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OFM16100
Reporting funds: provision of information to HMRC: obligation
to provide information – Regulation 107
In order to ensure that the offshore funds regime functions properly HMRC may, from
time to time, need to request certain information, particulars or documents from
reporting fund managers. As offshore funds are clearly not within any UK jurisdiction,
except to the extent that they are required to comply with the reporting fund
regulations if they wish to be approved as reporting funds, HMRC cannot use its
normal enquiry powers provided by the Tax Acts. Regulation 107 therefore provides
HMRC with the necessary powers to require reporting funds to provide information,
particulars or documents.
Initial request
HMRC will only issue a formal notice when a fund or its manager has not adequately
responded to an informal request for the information required. Such an ‘initial
request’, as it is referred to in regulation 107, must be given to the fund or its
manager within a period of one year from the day that the fund provided the
information required under regulation 106 (see OFM16050).
Formal notice
When a reporting fund or its manager does not provide all of the information
requested under an initial request then HMRC may give notice requiring the fund or
its manager to provide such information, particulars or documents in the power or
possession of the fund or its manager within a period specified in the notice (this
cannot to be less than 42 days, and may be extended by HMRC where they consider
it reasonable to do so), that HMRC reasonably require to check whether the fund has
met or continues to meet its obligations under the regulations.
Reporting funds and managers have a right of appeal against such notices. A notice
of appeal must be given to HMRC within a period of 42 days beginning with the day
on which the formal notice was given.
Appeals will be heard by the First-tier Tribunal (or the Upper Tribunal if so
determined by Tribunal procedure rules) who may either uphold, vary or quash the
notice.
.
Failure to provide information, particulars or documents
If a reporting fund fails to provide the requested information, particulars or documents
within the time specified in the notice issued by HMRC or within such further time as
HMRC may agree, it will be considered to have breached the reporting fund
requirements set out in the regulations.
Such a breach will be considered to be a serious breach, and will result in HMRC
issuing an exclusion notice (regulation 113 - see OFM16500 onwards for details of
breaches and their consequences).
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Reporting funds
OFM16500
Breaches of reporting fund conditions
Contents
OFM16550
OFM16600
OFM16650
Introduction
Types of breaches
Consequences of breaches
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OFM16550
Reporting funds: breaches of reporting fund conditions:
introduction
Entry into the reporting funds regime is subject to a number of conditions and
obligations on the part of funds. The regime is designed to provide a level of certainty
to funds, for example by allowing them to apply for reporting fund status in advance
of preparing their first accounts, or indeed in advance of the fund actually being
formally set up.
In order for the reporting fund regime to work as intended it is important that funds
admitted into the regime meet the obligations placed on them by the regulations, and
as funds will not otherwise be within the jurisdiction of HMRC there are sanctions
available to HMRC to address any breaches.
Reporting funds should be able to meet their obligations, but where there is a failure
to do so and a breach of the reporting fund requirements occurs then the intention is
that any response should be reasonable and proportionate. However, where a fund
commits a serious breach of the requirements of the regulations, or a combination of
minor breaches within a certain period, the fund may be excluded from the reporting
fund regime. The following pages provide more information on ‘minor’ and ‘serious’
breaches, and how they are treated.
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Reporting funds
OFM16600
Breaches of reporting fund conditions: types of breaches
Contents
OFM16605
OFM16610
OFM16615
OFM16620
OFM16625
OFM16630
General
Difference between reported income and reportable income
Provision of report that is incorrect or incomplete
Cases where information is not provided
Minor breaches
Serious breaches
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OFM16605
Reporting funds: breaches of reporting fund conditions: types of
breaches: general – Regulation 108
The regulations define two types of breaches - ‘minor’ breaches and ‘serious’
breaches.
The two types of breaches are discussed in more detail in the following pages. In
summary –






a ‘breach’ is, specifically, a breach of part of the requirements of a fund and /
or its manager as set out in the regulations;
a breach will either be a ‘minor’ or ‘serious’ breach;
where a breach that is not a serious breach is discovered by the fund itself
and rectified without HMRC having discovered the breach as a result of an
informal request or a notice for information to be provided (see OFM16100)
then it will not be considered to be a breach;
minor breaches, provided there is a reasonable excuse or where they are
inadvertent and remedied as soon as reasonably possible, will not affect a
fund’s reporting fund status unless there are a specified number of such
minor breaches within a certain period (see OFM16620);
funds will only be excluded from the reporting fund regime for serious
breaches, which includes a specified number of minor breaches within a
certain period (see OFM16630);
there is an appeal process when a fund is excluded from the reporting fund
regime by way of an ‘exclusion notice’ issued by HMRC – see (OFM17100).
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OFM16610
Reporting funds: breaches of reporting fund conditions: types of
breaches: differences between reported income and reportable income –
Regulation 110
It is important that a reporting fund correctly calculates its reportable income
(regulation 63 – see OFM14000 onwards), because if it does not then the income
reported to the fund’s UK investors will in turn be incorrect, but it is possible that, for
various reasons, the reported income of a fund may differ from what should have
been reported.
Where there is a difference between the correct reportable income of a reporting
fund for a period of account, and the reported income of the fund for all reporting
periods comprised in the period of account, there may be a breach of the regulations.
To determine this, once it has been established that the computation of reportable
income was incorrect (where HMRC conclude that the difference is more than 10%,
they must give notice to the fund of that conclusion), two figures must be compared
for each reporting period comprised in the period of account –
(a) the amount of the reported income for that reporting period, and
(b) the amount of the correct reportable income for the period of account that is
referable to that reporting period.
Whether there has been a breach of the regulations will depend on the difference
between those two figures, as follows.
Difference of 10% or less
If the difference between the two amounts above is 10% or less of the reportable
income, there is no breach of the regulations. However, this does not constitute a ‘de
minimis’ for reporting purposes, and funds should not adjust their reportable income
in such a way.
Difference more than 10% but not more than 15%
If the difference between the two amounts is more than 10% but 15% or less of the
reportable income then an amount equal to the difference must be added to the
reported income in any one of the following ways –

for the reporting period in which the error is established, or

for the following reporting period, or

the fund must make a supplementary report for the period of account in which
the difference occurs within 3 months of the end of the period of account in
which the error is established. The supplementary report must be made to
any investor who held an interest in the fund at the end of the period of
account in which the difference occurred. If the supplementary report is made
as soon as reasonably possible, there is a minor breach, but otherwise there
is a serious breach (see OFM16650 onwards – consequences of breaches).
Difference more than 15%
If the difference between the two amounts is more than 15% of the reportable
income, the reporting fund must make a supplementary report to investors for the
period of account in which the difference occurs within 3 months of the end of the
period of account in which the error is established. The supplementary report must
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Offshore Funds Manual
be made to any investor who held an interest in the fund at the end of the period of
account in which the difference occurred. If the supplementary report is made as
soon as reasonably possible, there is a minor breach, but otherwise there is a
serious breach (see OFM16650 onwards – consequences of breaches).
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Offshore Funds Manual
OFM16615
Reporting funds: breaches of reporting fund conditions: types of
breaches: provision of incorrect or incomplete report – Regulation 111
If a reporting fund provides an incorrect or incomplete report to its UK participants or
to HMRC as required by Chapters 7 or 9 of the regulations, other than one that is
incorrect due to a difference between reported income and reportable income under
regulation 110 (see OFM16610), there is a minor breach if the reporting fund
provides a correct report as soon as reasonably possible.
If the reporting fund does not provide a correct report as soon as reasonably
possible, there is a serious breach.
(See OFM16650 onwards – consequences of breaches).
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Offshore Funds Manual
OFM16620
Reporting funds: breaches of reporting fund conditions: types of
breaches: information not provided – Regulation 112
If a reporting fund does not provide the information specified in regulation 106(1) (see
OFM16050) to HMRC for a period of account and a report to all its UK investors
(regulations 90 & 92 – see OFM15000 onwards) for each reporting period comprised
in that period of account, by the day following the expiry of a period of six months
beginning immediately after the end of the period of account (referred to as the
‘relevant date’ in regulation 112), there may be a breach of the regulations, as
explained below.
Information provided within four months of the relevant date
If the reporting fund provides the information within a period of four months beginning
on the relevant date, then no breach of the regulations will be considered to arise.
Information provided within twelve months of the relevant date
If the reporting fund does not provide the information within a period of four months
beginning on the relevant date but does provide the information within a period of
twelve months beginning on the relevant date, a minor breach arises.
Information not provided within twelve months of the relevant date
If the reporting fund does not provide the information within a period of twelve months
beginning on the relevant date, there is a serious breach.
(See OFM16650 onwards – consequences of breaches).
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Offshore Funds Manual
OFM16625
Reporting funds: breaches of reporting fund conditions: types of
breaches: minor breaches – Regulation 108
A breach of a requirement imposed by the regulations is a ‘minor breach’ if it is not
specified as a serious breach (under regulations 110 to 113) provided the fund or the
fund manager has a reasonable excuse for the breach, or the breach is inadvertent
and remedied as soon as reasonably possible.
Where a reporting fund corrects what would otherwise be regarded as a minor
breach without any HMRC intervention (that is, HMRC do not ask the fund to provide
them with information, etc, under regulation 107) then no breach will be considered to
arise at all. For these purposes, if HMRC request further information to assist a fund
in correcting a breach which the fund has drawn to HMRC attention then that will not,
of itself, constitute an intervention.
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Offshore Funds Manual
OFM16630
Reporting funds: breaches of reporting fund conditions: types of
breaches: serious breaches – Regulation 113
In addition to the circumstances described in OFM16610 to 16620 which could give
rise to a serious breach unless specified remedial action is taken, a serious breach
will occur in the following circumstances –

a reporting fund has a period of account exceeding 18 months;

a reporting fund has used an accounting practice that is not in accordance
with IAS and has not been approved by HMRC;

a reporting fund or its managers do not provide the information, particulars or
documents requested by HMRC in a notice given under regulation 107(1)
(see OFM16100) within the time specified, and there is no appeal against the
notice within the time specified in regulation 107(6); and

if a reporting fund does appeal against a notice given under regulation
107(1), but the tribunal varies the notice and the fund or its managers fail to
provide the information, particulars or documents within the time specified in
the notice as varied, and there is no appeal against the decision of the
tribunal.
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Offshore Funds Manual
Reporting funds
OFM16650
Breaches of reporting fund conditions: consequences of
breaches
Contents
OFM16660
OFM16670
OFM16680
Consequences of minor breaches
Consequences of serious breaches
Appeals against exclusion from reporting fund regime
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Offshore Funds Manual
OFM16660
Reporting funds: breaches of reporting fund conditions:
consequences of breaches: minor breaches – Regulation 109
A reporting fund that is in minor breach of the regulations will continue to be treated
as a reporting fund, unless there are minor breaches on four separate occasions in a
period of ten years beginning with the first day of the period of account in which the
first breach occurs, in which event the fourth breach will be a serious breach (see
OFM16630).
Note though that if a single event results in more than one minor breach within a
single period of account then only one minor breach is treated as arising in that
period of account.
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Offshore Funds Manual
OFM16670
Reporting funds: breaches of reporting fund conditions:
consequences of breaches: serious breaches – Regulation 114
When a serious breach arises under regulations 110 to 113 (see OFM16610 to
16620, and OFM16630), or as a consequence of a number of minor breaches under
regulation 109 (see OFM16660), and HMRC give notice of the serious breach to the
fund in question then the fund will be treated as a non-reporting fund for the reporting
period in which HMRC gives the notice and for all subsequent periods. This is subject
to two variations where –
i.
the fund, or its managers, fail to provide information requested by HMRC as a
result of a notice under regulation 107 and the fund has not appealed against
the notice – the fund will be treated as a non-reporting fund for the period in
which the notice under regulation 107 was given and for all subsequent
periods;
ii. a notice under regulation 107 was issued and the fund has appealed against
the notice – where the tribunal then varies the notice but the fund or its
managers fail to provide the information required by the varied notice and do
not appeal against the decision of the tribunal – the fund will be treated as a
non-reporting fund for the period in which the notice as varied was given and
for all subsequent periods.
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OFM16680
Reporting funds: breaches of reporting fund conditions:
consequences of breaches: appeals against exclusion from reporting fund
regime – Regulation 115
If HMRC issue an exclusion notice to a reporting fund under regulation 114 (see
OFM16670), the fund can appeal against that notice.
Any appeal must be given to HMRC within a period of 42 days, beginning with the
day on which the exclusion notice is given.
Appeals will be heard by the First-tier Tribunal (or the Upper Tribunal if so
determined by Tribunal procedure rules) who may either uphold or quash the notice.
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Offshore Funds Manual
OFM16750
Reporting funds: constant NAV funds – Regulations 118 to 124
A “constant NAV fund” is an offshore fund whose net asset value (expressed in the
currency in which units are issued) does not fluctuate by more than an insignificant
amount throughout the fund’s existence, as a result of the nature of the fund’s assets,
and the frequency with which the fund distributes its income (regulation 118).
The reporting fund rules are modified in a number of respects for constant NAV
funds, as follows –
Application for reporting fund status – regulation 120
On making an application for reporting fund status, a constant NAV fund need not
provide all of the items required by regulation 53 (see OFM12650). Instead, together
with its application it is only required to provide –

a statement of the first period of account for which it is proposed that the fund
should be treated as a constant NAV fund for the purposes of the regulations,

a statement that the fund is, or will be, a constant NAV fund at the beginning
of that first period of account, and

an undertaking to notify HMRC if the fund ceases to be a constant NAV fund.
Unless HMRC rejects an application (because, for example, it is incomplete), a fund
becomes a “constant NAV fund” on whichever is the later of the first day of the first
period of account for which it is proposed the fund should be a constant NAV fund, or
the day on which the fund is established (the latter may be later where there is a
delay in setting up an offshore fund, and the application was made in respect of a
prospective constant NAV fund).
Once a fund has been accepted as a constant NAV fund, it does not need to comply
with the requirements of Chapters 4 to 9 of the regulations (which deal with the
preparation of accounts, the computation of reportable income, transactions not
treated as trading, reports to participants (i.e. investors), the tax treatment of
participants, and the provision of information to HMRC). The fund will then continue
to be treated as a constant NAV fund until it notifies HMRC that it has ceased to be a
constant NAV fund. However if, after a fund has been accepted as a constant NAV
fund, the value of the fund’s assets (expressed in the currency in which units in the
fund are issued) rises by more than an insignificant amount and the fund has not
notified HMRC that it has ceased to be a constant NAV fund then a participant who
subsequently disposes of an interest in the fund and who makes a chargeable gain
on the disposal is treated as making an offshore income gain (regulation 123).
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Offshore Funds Manual
OFM17000
Reporting funds: leaving the reporting fund regime: notice given
by fund - Regulation 116
If a reporting fund no longer wishes to be a reporting fund it can give notice
specifying a day from which the reporting fund regulations will cease to apply to the
fund. Any day specified must be the last day of a period of account of the reporting
fund, and the notice must be given in writing to HMRC before that ‘specified day’.
The fund must also make the notice available to each participant before the specified
day (by, for example, writing to or emailing those investors, or publishing the
information on a website or in a newspaper widely circulated within the UK).
Note that the requirement to notify participants is not restricted to UK residents as
interests may be held on a UK investor’s behalf by an offshore trust, or the fund may
have investors that are themselves offshore funds and thus need to be informed that
the fund has left the reporting fund regime.
A fund that has received an exclusion notice (see OFM16870) cannot subsequently
give notice itself that it wishes to leave the reporting fund regime and if such a notice
is given it will not have effect, unless the fund successfully appeals against the
exclusion notice (see OFM16680).
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Offshore Funds Manual
Transitional rules
OFM17500
Contents
OFM17550
OFM17600
OFM17650
OFM17700
OFM17750
OFM17800
Transitional rules
Introduction
Existing fund becomes non-reporting fund on 1 December 2009
Applications for distributing fund status for overlap period
Existing distributing fund: no application for distributing or
reporting fund status
Offshore fund previously a non-qualifying fund
Reporting fund previously not within definition of an offshore
fund
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Offshore Funds Manual
OFM17550
Transitional rules: introduction - Schedule 1 para (2)
The definition of an offshore fund at section 40A(2) FA 2008 (inserted by FA 2009)
applies to interests acquired on or after 1 December 2009 and replaces the previous
definition at section 756A ICTA. The 2009 definition is supplemented by the Offshore
Funds (Tax) Regulations 2009 which contain the operational rules, whereas the
operational rules relating to the previous definition were contained within Chapter 5 of
Part 17 and Schedules 27 & 28 of ICTA.
The regulations contain a number of consequential amendments to parts of the Tax
Acts that made reference to the legislation within ICTA – these can be found at
regulations 125 to 131.
Schedule 1 of the regulations contains transitional provisions. These are explained
over the following pages.
In addition to the transitional rules, which as the name suggests only address
situations that may occur during the transition period, there are further provisions
within the offshore funds regulations that address particular situations that may arise
going forward, as follows –




Regulation 30: rights in certain existing holdings (as at 1 December 2009, i.e.
‘grandfathering provisions) – see OFM10220;
Regulation 43: special rules for certain existing holdings (identification rules
on disposal where investor has some rights in an offshore fund that are
grandfathered and some that are not) – see OFM10800;
Regulation 48: conversion of non-reporting fund to reporting fund (deemed
disposal election by investors) – see OFM11500;
Regulation 100: deemed disposals of interests (election by investors where a
reporting fund becomes a non-reporting fund) – see OFM15800.
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Offshore Funds Manual
OFM17600
Transitional rules: existing fund becomes non-reporting fund on
1 December 2009 - Schedule 1 para (2)
Paragraph (2) of Schedule 1 makes it clear that if an investor holds an interest in a
fund on 1 December 2009 that came within the definition at section 756A ICTA and
also comes within the definition at section 40A FA 2008 from that date then, if the
fund becomes a non-reporting fund at that (or any later) date and an investor
subsequently disposes of an interest in the fund then any gain on the disposal will be
taxed as an offshore income gain in respect of the entire period that the investor held
the interest in the fund.
Where the fund was previously a non-distributing fund for the purposes of Chapter 5
of Part 17 of ICTA then this will not result in any change to the investor on a disposal
of their interest. However, where the fund was previously a distributing fund there
could be an adverse effect for the investor if the fund does not then successfully
apply for reporting fund status. There are therefore further provisions within
Paragraph (3) of Schedule 1 that may apply – see OFM17700.
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OFM17650
Transitional rules: applications for distributing fund status for
overlap period - Schedule 1 paras (3) and (6)
Paragraph (3) of Schedule 1 contains transitional provisions that allow existing funds,
should they wish to do so, to –


apply in writing to HMRC for distributing fund status for the period of account
that ‘straddles’ the 1 December 2009 (called ‘the overlap’ period in paragraph
(3)), and
if a successful application has been made for the overlap period, to also apply
to continue to be treated as a distributing fund for the succeeding period.
but only in respect of periods ending on or before 31 May 2012 (paragraph 3B).
If a fund makes a successful application for distributing fund status for the overlap
period and / or the succeeding period and then immediately becomes a reporting
fund for the subsequent period of account, it will be treated as if it had been a
reporting fund from the first day that it actually became a distributing fund to the
period ending on the last day of the overlap or succeeding periods for which it
obtained distributing fund status - provided, of course, it was in fact a distributing fund
continuously during that time (paragraph (6) Schedule 1).
In order to allow an application for distributing fund status for the overlap period the
‘old’ offshore funds legislation continues to be effective for this purpose (Paragraph
3(4)). The application for distributing fund status for this period (and for the
succeeding period, if desired and if permitted by paragraph 3(3) or 3(3A)) is therefore
made under the ‘old’ legislation in Chapter 5 of Part 17 Income and Corporation
Taxes Act 1988.
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OFM17700
Transitional rules: existing distributing fund: no application for
distributing or reporting funds status - Schedule 1 para (4)
If a distributing fund does not become a reporting fund immediately following the end
of the last period of account for which it was approved as a distributing fund then UK
investors would, without any further provision, be charged to tax on an offshore
income gain when they subsequently disposed of their interest in the fund.
Paragraph (4) of Schedule 1 provides for UK investors to make a deemed disposal
election to be treated as disposing of an interest in a distributing fund at the end of
the fund’s last period of account for which it was approved as a distributing fund, and
acquiring an interest in a non-reporting fund at the beginning of the fund’s first period
of account for which it is not a distributing fund, for chargeable gains purposes.
A deemed disposal will be treated as made for a consideration equal to the net asset
value of the investor’s interest in the fund at the deemed disposal date, and any gain
or loss will come into charge at that date. The deemed acquisition will be treated as
made for consideration equal to the deemed disposal proceeds.
If the investor is chargeable to income tax, the election must be made by being
included in a return made for the tax year which includes the deemed disposal date.
If the investor is chargeable to corporation tax, the election must be made by being
included in the company tax return for the accounting period which includes the
deemed disposal date.
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OFM17750
Transitional rules: reporting fund previously a non-qualifying
fund - Schedule 1 para (5)
The deemed disposal provisions under regulation 48 that apply when a non-reporting
fund converts to a reporting fund (see OFM11500) are modified by para (5) of
Schedule 1 where a fund that was a non-distributing fund prior to 1 December 2009
becomes a reporting fund from 1 December 2009 (because its period of account
commences on that date and it successfully applies for reporting fund status).
References to a non-reporting fund are substituted with references to ‘the existing
fund’. This transitional rule is necessary because a fund cannot be a ‘non-reporting
fund’ before the regulations take effect on 1 December 2009, and so without this
provision investors in a fund that was a non-distributing fund (under the old rules) and
had a period of account ending on 30 November 2009, but subsequently became a
reporting fund with effect from 1 December 2009, would be unable to make a
deemed disposal election under regulation 48.
UK investors will therefore be able to make a deemed disposal and realise an
offshore income gain on any accrued gains to that date, with any further gains on a
subsequent disposal from then on being subject to tax on chargeable gains (provided
the fund has maintained reporting fund status from 1 December 2009 to the date of
disposal).
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Offshore Funds Manual
OFM17800
Transitional rules: reporting fund previously not within definition
of an offshore fund - Schedule 1 para (7)
A fund that was not an offshore fund within the definition in Chapter 5 of Part 17 of
ICTA prior to 1 December but is within the definition in section 40A(2) applying to
holdings acquired on or after 1 December 2009 can apply for reporting fund status in
relation to a period of account that is current on 1 December 2009 (note this only
applies to funds that were not previously within the ICTA definition – so funds that
were within the ICTA definition may only apply for reporting fund status from the
beginning of the first period of account commencing on or after 1 December 2009
and not for periods that are current as at 1 December 2009).
Applications must be received by HMRC on or before 31 May 2010.
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